What Is Financial Contagion? Causes, Solutions & Examples
Germs are the root cause behind many health issues: Mere microns in size, they invade our bodies and produce toxins that cause disease, making a person…
Financial contagion refers to the spread of a problem by direct or indirect contact.
Peoplelmages from Getty Images Signature; Canva
Germs are the root cause behind many health issues: Mere microns in size, they invade our bodies and produce toxins that cause disease, making a person very ill. A contagious disease doesn’t just affect one person, though—it spreads from one person to the next, often without their knowing it. For example, according to the U.S. Center for Disease Control (CDC), measles is so contagious that, if one person gets it, 90% of the people they are in contact with will become infected as well.
What Is Financial Contagion? Why Is It Important?
Just like the scientific term, contagion in finance refers to the spread of a problem by indirect or direct contact. The very complex and connective tissues of globalization that power today’s economies are made from a network of resources, materials, manufacturing, and investment. When one aspect of the global economy becomes unstable, it can cause weakness to grow, while damage spreads and quickly amplifies—often with disastrous consequences.
What Are Some Examples of Financial Contagion?
Contagion in finance can be best understood through examples, some of which read more like soap operas than real life.
Asian Currency Crisis
This crisis began with Thailand, which had enjoyed rapid development in the 1980s and 1990s to the tune of 5–10% GDP growth per year, yet its economy was still considered a pretty small player on the world’s stage. Paul Krugman famously compared Thailand’s purchasing power to that of the state of Massachusetts. But Thailand triggered a global set of falling dominoes in 1997 when it devalued its currency, the baht.
Foreign investment had fueled much of Thailand’s rapid boom: Export manufacturers set up new factories, real estate speculation grew, and both private and public capital inflows ballooned to more than $250 billion by the mid-90s.
The Thai government allowed currencies to rise while simultaneously increasing its monetary supplies, which caused credit to expand and fueled even more investment. However, the side effects were steep: Thailand’s debts skyrocketed, and its foreign exchange reserves became depleted, and so when authorities finally took measures to rein in the bubble, investors panicked. Many speculative loans became insolvent, specifically in real estate. Thai equity markets tanked, its banks came under pressure, GDP growth slowed, and a recession was triggered.
But the selloffs spread far beyond Thailand’s borders as investors lost confidence not just in its singular economy but rather in all “emerging market” investments throughout Asia, effectively crippling the economies of Malaysia, the Philippines, as far away as South Korea—and even sparked political unrest in Indonesia.
Financial Crisis of 2007–2008
U.S. subprime mortgages were to blame for a financial crisis of global proportions in 2007 and 2008. Millions of buyers, eager for their chance at the “American dream” of home ownership, took out risky, adjustable-rate mortgages during the height of a housing boom. Many did not understand how the terms of these mortgages would change to the tune of several thousand dollars a month in the event that interest rates went up.
When the Federal Reserve sought to stave inflationary pressures through a series of rate hikes between 2004 and 2006, they unleashed an avalanche: First, homeowners defaulted on their mortgages. At one point nearly 10% of all U.S. mortgages were delinquent or in foreclosure. Next, banks, which had pooled the home loans into interest-bearing securities called collateralized mortgage obligations (CMOs) and traded them with investment banks around the world, would experience the implosion of these toxic debts, leaving many on the brink of insolvency. Finally, overleveraged government-sponsored home ownership enterprises like Fannie Mae and Freddie Mac needed emergency bailouts so that they, too, would not go out of business.
Investment bank Lehman Brothers failed on September 15, 2008, causing the stock market to crash and triggered selloffs around the world, leading to a 2-year recession known as the Great Recession.
Cryptocurrency Contagion
FTX, the third-largest cryptocurrency exchange at its height, went from a $32 billion valuation to declaring bankruptcy over the course of a few days in November 2022, bringing much of the crypto world down with it. After founder and CEO Sam Bankman-Fried admitted to “messy accounting,” the company disclosed a lack of liquidity stemming from depositor withdrawals, as FTX did not have enough reserves to cover them.
The night after Sam Bankman-Fried stepped down as CEO, hackers stole hundreds of millions of dollars of tokens; Bankman-Fried was later arrested on criminal charges of securities fraud and money laundering and extradited to the United States in December, 2022.
The fallout from FTX affected the entire cryptocurrency market as investment firms had put hundreds of millions of dollars into digital tokens, only to watch their value erode as shares of FTX plummeted. Investors, already wary of investing in crypto, became reluctant to re-enter the digital currency markets; in addition, digital currencies are expected to face increased regulation from the Securities and Exchange Commission and other regulatory authorities.
What Are the Causes of Financial Contagion?
“When Paris sneezes, the whole world catches a cold.” –Klemens von Metternich, 1813
A financial crisis doesn’t always lead to contagion, but in today’s interconnected markets, even when risks are hedged, a shock in one country can trigger a global asset selloff as well as a credit crunch.
After all, the very channels through which financial shocks are transmitted transcend state lines. These channels include trade links, international financial markets, and banking centers, which often hold both domestic and foreign securities.
In the case of the 2007–2008 Financial Crisis, failures in the U.S. subprime mortgage market were transmitted to the rest of the world through bank linkages. In the case of the Asian Currency Crisis, it was trade links: The Thai government attempted to safeguard economic competitiveness by devaluing its currency.
What Are the Effects of Financial Contagion?
Just like its name, the effects of contagion can be widespread. Some of the fallout includes (but is not limited to):
Financial crises that affect a country’s currency can spillover to other countries as institutional fund managers apply “rules of thumb,” which weakens demand for assets in other parts of the region as well.
When a financial crisis triggers a loss of confidence in depositor accounts, bank runs may occur. And when hundreds of a bank’s customers simultaneously demand their money back, more often than not, that bank will fail.
Contagion leads to volatility in equity markets, including selloffs and even capitulation.
As investors dump shares of toxic assets, they create a “flight to liquidity,” seeking safety in more historically secure investments, such as U.S. Treasury bonds.
How Is Financial Contagion Resolved?
Oftentimes, legislative or regulatory authorities need to step in to stem the hemorrhaging, but it could take years for the entity in crisis to get back on track—if ever.
In the case of the Financial Crisis of 2007–2008, the United States Congress passed the $700 billion Troubled Asset Relief Program (TARP) in 2008. In addition, the Federal Reserve began a series of quantitative easing measures and slashed interest rates to zero for an unprecedented 6-year period between 2008 and 2014 to make banks comfortable lending again.
Are We Experiencing Financial Contagion?
Silicon Valley Bank (SVB) failed on March 10, 2023 and triggered a crisis in confidence in the global banking sector. SVB had invested in bonds when interest rates were low but did not hedge its risks when rates shot up in 2022. In addition, SVB’s customers were startups and technology firms, which had floundered through the COVID-19 pandemic. As these firms needed access to their deposits in order to satisfy customer withdrawal requests, SVB simply could not keep up—and it collapsed.
Signature Bank, located in New York, was next to fall, on March 12.
On March 17, another lender declared itself in crisis, First Republic Bank, and Wall Street titans JP Morgan Chase, Citigroup, and Bank of America, among others, came to its rescue with $30 billion in liquidity. Credit Suisse took a $54 billion lifeline from the Swiss government before being acquired by UBS for $3.2 billion on March 19.
The U.S. government stepped in by guaranteeing deposit accounts at SVB and First Republic, and the Federal Reserve, Department of the Treasury, and Federal Deposit Insurance Corporation (FDIC) released a joint statement of support. They also unveiled a Bank Term Funding Program to allow troubled banks to access loans at par for up to one year. In addition, famed investor Warren Buffett is in talks with the White House about a possible investment in regional banks.
What are the best metaverse projects that investors should keep on their radar? Cointelegraph Research Metaverse Ranking Awards the top projects
The metaverse continues to expand, with industry giants and upcoming players racing to seize a slice of the potentially trillion-dollar pie. Close to $2 billion was invested in blockchain-based metaverse deals in 2022, according to Cointelegraph Research’s VC database.
A 2022 report by McKinsey estimated the metaverse industry to potentially generate up to $5 trillion in revenue by 2030, an estimate overtaken by Citi's forecast of $8 to $13 trillion. These estimations reflect significant growth from the global metaverse market of $65.5 billion recorded in 2022. To realize these optimistic forecasts, the metaverse industry would need to sustain an impressive 85% compound average growth rate.
VC metaverse funding in 2022. Source: Source: Cointelegraph Research.
Investors will never guess which metaverse won Cointelegraph’s 2023 Ranking of Metaverses. This blockchain-based metaverse has over $61 million in value locked in its smart contracts and over 8,000 monthly users. To learn more about the project that enables true ownership of in-game assets and has a deflationary token model, read the report now.
Yet, the metaverse landscape is not without its difficulties. Market cap losses have plagued industry leaders, with Meta, formerly known as Facebook, losing 77% of its market cap equivalent to $800 billion between late 2021 and 2022. As a result, Meta’s CEO, Mark Zuckerberg, plans to eliminate 21,000 jobs in 2023.
Despite setbacks, industry titans like Microsoft, Apple, Nvidia, and Qualcomm are all developing their metaverse strategies. Apple's entry into the metaverse is highly anticipated with its AR/VR headset launch slated for June 2023. Similarly, gaming firms like Epic and Roblox utilized the pandemic lockdown to their advantage, successfully launching metaverse concerts that reached millions worldwide.
In 2022, mergers, acquisitions, and financing in the metaverse realm rose from $13 billion in 2021 to over $120 billion, bolstered by Microsoft's $69 billion acquisition of Activision. This deal had a 7.6x EV/Sales multiple and a 20.2x EV/EBITDA multiple. Although valuation multiples are expected to decrease in line with higher interest rates, investment activities remain robust.
Top blockchain metaverse projects are also attracting significant capital. Leading blockchain metaverses measured by market cap include The Sandbox ($1.02 billion), Decentraland ($905 million), and Axie Infinity ($830 million). Year to date (YTD) performance of The Sandbox is 44%. Decentraland’s YTD is 62%. Neither of them surpasses Bitcoin’s YTD retu of 68%.
For investors seeking exposure to the metaverse, ETFs like the Fidelity Metaverse ETF (FMET) and Roundhill Ball Metaverse ETF (METV) offer viable options. However, the new Cointelegraph Research study reveals that a majority of token transactions in metaverse projects result from speculation rather than actual in-metaverse usage, a trend that calls for cautious investment.
The Cointelegraph Research team
Cointelegraph’s Research department comprises some of the best talents in the blockchain industry. The research team comprises subject matter experts from across the fields of finance, economics and technology to bring the premier source for industry reports and insightful analysis to the market. The team utilizes APIs from a variety of sources in order to provide accurate, useful information and analyses.
The opinions expressed in the article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.
How a neighborhood-focused Baltimore initiative is employing patience, partnership, and resident leadership to drive long-term change
At the corner of North and Cecil Avenues in Central Baltimore sits the newly constructed home of a community-based organization, Roberta’s House, which…
At the corner of North and Cecil Avenues in Central Baltimore sits the newly constructed home of a community-based organization, Roberta’s House, which provides mental health and grief counseling services to residents who may not otherwise get these much-needed services. The building represents a transformational investment designed to bring new life to a vacant block that was previously occupied by rowhomes.
When construction on Roberta’s House broke ground in 2018, the two sides of Cecil Avenue at this corner were divided, both physically and symbolically. The juxtaposition of abandoned rowhomes on one side and hope rising from the ground on the other side, sparked a thought among staff at Baltimore’s Weinberg Foundation: What if this building were to be the start of a ripple of redevelopment and opportunity in the neighborhood?
And so, the revitalization of this one building on this one corner would soon become part of something bigger—a philanthropic-funded effort to improve the health and life trajectory of Central Baltimore residents. This piece tells the story of lessons from the Greenmount Life, Opportunity, and Wellness (GLOW) Initiative, a new effort to concentrate financial and social investment in select neighborhoods that have long experienced underinvestment.
Developing a hyper-local strategy rooted in strength
Created in 1990, The Harry and Jeanette Weinberg Foundation had been funding Baltimore-based nonprofits for 30 years when, beginning in 2018 and following many conversations with stakeholders, the foundation adopted a hyperlocal, place-based strategy (while continuing to provide grants across the Baltimore region). The premise was that by focusing some of the foundation’s financial and social capital in a compact geographic area, it could drive positive outcomes in an even more targeted way. Out of this decision came GLOW.
We knew that one of the most important factors in getting GLOW off the ground was choosing the right area on which to focus our efforts. Several factors led to our selection of four Central Baltimore neighborhoods, Midway, Barclay, Harwood, and Greenmount West, including:
Need: Many residents of our target neighborhoods had limited economic opportunity and poor health. Midway, for example, had the highest unemployment rate of any neighborhood in the city, the sixth lowest life expectancy, and one of the city’s highest concentrations of children living in poverty.
Concurrent investment: While Baltimore City, despite decades of disinvestment, had designated the area as one of its “Impact Investment Areas,” other major developments, including a large nonprofit makerspace, were already underway or forthcoming in the area. Meanwhile, a coalition of funders had also recently launched the Central Baltimore Future Fund to catalyze commercial redevelopment. We recognized that GLOW would be more successful if it aligned with those efforts.
Partners: The area also is home to four public schools and many nonprofits, including Central Baltimore Partnership (CBP), a nonprofit collaborative of over 100 organizations dedicated to the revitalization of Central Baltimore neighborhoods. These partners already had meaningful relationships and capacity that if brought together could help achieve more positive outcomes for the neighborhoods around GLOW’s goals.
With all of this in mind, Weinberg Foundation saw an opportunity to improve Central Baltimore’s economic and public health outcomes by working with CBP to physically transform the four neighborhoods, while placing special emphasis on health and educational outcomes for their residents. In this way, the Foundation was able to tap into existing organizational infrastructure—essentially building from strength instead of building from scratch.
Strong and glowing: From an idea to implementation
The central purpose of GLOW is to mobilize and coordinate an array of organizations to improve the health and life trajectory of Central Baltimore residents by improving access to, and utilization of, primary health care, nutritious food, and enriching educational or career opportunities for youth. While the long-term goal is to make an impact on key indicators like unemployment and life expectancy, we know that those will take years. In the interim, we are squarely focused on supporting the initiative as a platform for aligning multiple organizations, sourcing and advancing residents’ goals and desire, lifting up residents as leaders, and attracting additional resources to the neighborhood.
We’ve had some early wins. For example, GLOW has established a network of more than 30 service providers, including a national organization it recruited to the neighborhood, which will connect 125 families with housing, employment, financial, and supportive services that help increase economic mobility. Other wins include expanding paid summer youth opportunities in the neighborhood by partnering with Banner Neighborhoods to operate a YouthWorks site, and catalyzing the development of several key capital projects including an outdoor education and community health hub along with a teaching kitchen. Along the way, we’ve also learned a lot of lessons relevant for any equity-focused place-based initiative, including:
The lead organization for a place-based initiative—CBP in the case of GLOW—must be adept at navigating a range of efforts and stakeholders. Specifically, it must be capable of both strategic and tactical efforts and have trust and relationships with a range of stakeholders, including funders, government leaders, and residents. The organization must focus on strategy at all levels and not get bogged down in the day-to-day of providing services and activities in the neighborhood.
Genuine partnership means more than ‘partners on paper’. Partnership, like collaboration, is a term that gets used a lot and can mean different things to different people. With GLOW, we have found that true partnership requires more than regular meetings or information sharing. It demands building trusting relationships rooted in an “if you win, I win” mentality instead of in the scarcity mindset that often pervades the nonprofit sector, especially when it comes to working with foundations. It means jointly applying for funding, being clear about expectations and roles, and navigating conflict.
Community leadership is as important as community engagement. For place-based initiatives like GLOW, it’s critical that residents not just be engaged in typical ways like surveys or public meetings. Instead, residents should have genuine leadership and decision-making authority— meaning equal or greater representation on the committee overseeing the initiative, with compensation for their time and insights.
Planning takes time and resources. Place-based initiatives require coordinating across city agencies, nonprofit organizations, and resident leaders—as well as including visible wins in early months to build trust and buy-in with residents and partners. This took us two years and required flexibility as the COVID-19 pandemic extended timelines and shifted our attention. Even under normal circumstances planning requires significant staff time to thoughtfully engage residents and stakeholders in small group and one-on-one conversations.
Patience is essential. Place-based initiatives require a long-term commitment due to the nature of developing the infrastructure across sectors to create systemic, long-term change. Phases include understanding the challenges and opportunities in the community, building the infrastructure across multiple partners, and capacity building for anchor institutions—all before achieving neighborhood-level outcomes.
With these lessons in mind, we are continuing to invest in and build GLOW so it can serve as a platform for convening resident and stakeholders to drive change in Central Baltimore for many years to come. By focusing on strategy, building true partnerships, centering residents as leaders, investing in planning, and operating with a sense of flexibility and patience, we believe other funders and community-based organizations can build similar initiatives to help transform underinvested neighborhoods.
Alex Zhavoronkov, PhD, founder and CEO of Insilico Medicine (“Insilico”), a generative artificial intelligence (AI)-driven drug discovery company, will present on the latest company milestones at the Jefferies Global Healthcare Conference on June 8, 4:30pm ET at the Marriott Marquis in New York City. The conference brings together hundreds of public and private healthcare companies and thousands of executives, as well as institutional investors, private equity investors, and VCs discussing trends and investment opportunities in healthcare in the US.
Credit: Insilico Medicine
Alex Zhavoronkov, PhD, founder and CEO of Insilico Medicine (“Insilico”), a generative artificial intelligence (AI)-driven drug discovery company, will present on the latest company milestones at the Jefferies Global Healthcare Conference on June 8, 4:30pm ET at the Marriott Marquis in New York City. The conference brings together hundreds of public and private healthcare companies and thousands of executives, as well as institutional investors, private equity investors, and VCs discussing trends and investment opportunities in healthcare in the US.
Zhavoronkov will share updates on Insilico’s rapidly progressing pipeline of novel therapeutics available for partnering and licensing, and showcase its new AI-driven fully robotic target discovery and validation platform, and end-to-end drug discovery platform, Pharma.AI, which includes target identification (PandaOmics), drug design (Chemistry42), and clinical trial outcome prediction (InClinico). The platform has produced three drugs that have reached clinical trials. Insilico’s lead drug for the devastating chronic lung disease idiopathic pulmonary fibrosis (IPF), the first AI-discovered and AI-designed drug to advance to clinical trials, will soon be entering Phase 2 trials with patients. Insilico’s generative AI-designed drug for COVID-19 and related variants has been approved for clinical trials and has a number of design advantages over existing COVID-19 drugs. Most recently, the company announced that its USP1 synthetic lethality inhibitor received FDA IND approval for the treatment of solid tumors.
There are 31 drugs in Insilico’s pipeline available for partnering and licensing for indications including cancer, fibrosis, and central nervous system diseases, and the Company has nominated 12 preclinical candidates in the past two years, most recently a potentially best-in-class preclinical candidate targeting ENPP1 for cancer immunotherapy and the potential treatment of Hypophosphatasia (HPP).
Insilico has partnered with leading pharma companies, including Fosun Pharma and Sanofi, to accelerate their programs. The Company has raised over $400m in funding to date from notable biotech and tech investors.
About Insilico Medicine
Insilico Medicine, a clinical-stage end-to-end artificial intelligence (AI)-driven drug discovery company, connects biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques to discover novel targets and design novel molecular structures with desired properties. Insilico Medicine is delivering breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system (CNS) diseases, and aging-related diseases.
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