Contagion is the term used in economic and financial spheres. It explains the situation when the crisis, unstable economic situation, financial crash spreads to other spheres, cities, states, countries. Lehman Brothers failure is the bright example of the domestic contagion.
During the crises at a particular market, the unstable situation can influence the other market. Contagion happens at the internal market when a bank sells a large part of its assets and loses the trust of other banks. At the foreign or external market, cross-border investment and trade can influence quick crashes of the closely correlated regional currencies.
It happened in 1997 when the Thai baht collapsed and the nearest East Asian countries felt it in the form of market crises. As the crisis was aggravating, it influenced Latin America and Eastern Europe markets. It shows how the crisis has spread beyond the regional market.
Let’s not forget at the brightest example of contagion effects in the history of the United States: The global Great Depression that was triggered by the U.S. Wall Street crash in 1929.
Experts call contagion so as it appears unexpectedly and spreads fast. Such processes as a global investment and cross-border trade can initiate contagion, especially speaking of the developing and unstable countries and markets. Larger and more developed markets usually manage to resist contagion.