Stopping the Syria Contagion

Third, and no less important, is the speculative contagion that underlies any bubble. The current boom has seen contagion

There's emotional contagion that takes place in human populations.

And, in fact, emotional contagion can be broader still.

In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble.

Despite the lack of significant financial contagion risk, a renewed Greek crisis, stemming from a lasting and serious breakdown of negotiations between the new government and EU institutions, would constitute a major problem for European cooperation. The absence of financial contagion would not rule out serious political repercussions.

Disclosure I am an investor in Contagion Health, and am considering investments in MedRewards and HealthRally.

On the Y axis is the cumulative instances of contagion, and on the X axis is the time.

A strong fiscal framework is indispensable to achieve this, and protects countries from contagion. But the crisis experience suggests that, in times of extreme market tensions, even a sound initial fiscal position may not offer absolute protection from spillovers.

We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

And, not only do they protect the people who sleep under them, but they have these great contagion benefits.

Second, countries must move together. Otherwise, one country s restructuring will heighten expectations that others will follow, giving rise to contagion.

Bitter experience has shown us that instability in one State can have a powerful contagion effect far beyond its borders.

If half of a community sleeps under a net, the other half also benefits because the contagion of the disease spread.

Concerned about the excessive volatility of speculative short term capital flows and the contagion effects in financial markets in times of crisis,

Greece is both small and in a uniquely desperate position. So it is possible that other fragile members Spain, Portugal, and Italy would be spared from financial contagion and the euro's viability would not be dramatically affected.

It would seem that bid offer spreads are falling, which we might regard as positive. But volatility has risen, as has cross market contagion.

Since the crisis, the Asia Pacific countries have looked more closely at developing greater financial cooperation to prevent a contagion and to assist the affected countries.

And we see this when lovers walk down the street, when a crowd in Egypt or Tunisia gets caught up in an emotional contagion, the deep interpenetration.

Contagion effects, which may not reflect a deterioration of fundamentals but just a common investors base, can be damaging to countries that are highly dependent on foreign financing.

For the second time in less than four years, Asia is being hit with a major external demand shock. This time it is from Europe, where a raging sovereign debt crisis threatens to turn a mild recession into something far worse a possible Greek exit from the euro, which could trigger contagion across the eurozone.

Societies should be willing to go out and subsidize the net, give them for free, or, for that matter, pay people to use them because of those contagion benefits.

In contrast to the other two psychological causes, speculative contagion has a natural end. A speculative bubble, sustaining itself solely by reaction to price increases, cannot go on forever.

It is a question that I am repeatedly asked at seminars and conferences. After all, participants in the housing and equity markets set prices with a view to prices in the bond market, so contagion from one long term market to another seems like a real possibility.

As a result, the debtor countries bond prices would collapse, interest rates would soar, and banks would be threatened with collapse. If the contagion from Greece intensified, the next weakest country, probably Portugal, would find itself unable to support its banking system or pay its debts.

Embassies have issued warnings to tourists and their citizens living in France television news programs have shown hours of footage of burning cars. Other countries governments, it seems, have been trying to distance themselves from the problem, fearing a contagion that they know is likely to spread.

The European Central Bank s outright monetary transactions scheme provides an important backstop for debt sustainability. And a banking union, once completed, should contain the risk of financial crisis and contagion.

Thailand in particular is leading the charge to insure against the vulnerabilities of the contagion that broke out in South East Asia and spread to other parts of the world.

Robert May, an eminent climate change expert, has argued that techniques from his discipline may help explain financial market developments. Epidemiologists have suggested that the study of how infectious diseases are propagated may illuminate the unusual patterns of financial contagion that we have seen in the last five years.

After all, by allowing people to spend more than they have, borrowed money can fuel growth. But today, Africa s pay as you go practices are a powerful defense against financial contagion.

For starters, Chinese officials should be under no illusion that the country will be immune to financial contagion. A Grexit would hit European banks that hold peripheral eurozone countries sovereign bonds.

China moved to current account convertibility in 1996, but retained a substantial number of controls on capital movements, which have served as a shield against financial contagion. Are these still needed?

It also appeared that since the Russian crisis there has not been a contagion effect in the forms of drying up of credit or higher spreads for other emerging market countries.

In the short term, the London summit mitigated financial contagion emanating from southern Europe gave the World Bank additional resources to deal with the problem of trade finance for emerging market exports appeared to give the IMF more firepower and legitimacy and seemed to catalyze coordinated fiscal stimulus to restore confidence.

Greek politicians who still see the threat of financial contagion as their trump card should note the coincidence of the Greek election and the ECB s bond buying program and draw the obvious conclusion. The ECB s new policy was designed to protect the euro from the consequences of a Greek exit or default.

Indeed, while less ominous and dramatic than financial contagion, trade spillovers profoundly influence global growth prospects. Failure to recognize their impact implies that export and, in turn, growth projections will continue to miss the mark.

The euro crisis had its origin in German Chancellor Angela Merkel s decision, taken in the aftermath of Lehman Brothers default in September 2008, that the guarantee against further defaults should come not from the European Union, but from each country separately. And it was German procrastination that aggravated the Greek crisis and caused the contagion that turned it into an existential crisis for Europe.

Yes, financial markets in troubled countries for example, Russia s currency, equity, and bond markets have been negatively affected. But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.

In 2011, the government, fearing contagion from Tunisia and Egypt, where long established dictatorships had just been toppled, responded to the spread of protests by public sector workers by raising their salaries by 100 retroactively to 2008. But the plan backfired protests intensified, with other workers demonstrating for similar benefits and railing against the inflation that the move engendered.

A fully capable regional financial safety net could contain the contagion of financial shocks emanating from individual economies and prevent disruptions to the region s key growth drivers intra regional trade and investment. The CMIM could help East Asian countries to reduce their reliance on accumulating, as a form of self insurance, costly reserves that fuel global imbalances.

The euro s appreciation lays bare the huge collateral damage that Europe s rescue policy has caused. The measures taken so far have opened channels of contagion from Europe s crisis ridden peripheral economies to the still sound economies of Europe s core, placing the latter s taxpayers and pensioners at great financial risk, while hindering long term recovery in the troubled countries themselves.

In a world where capital is free to flow across international boundaries, the crisis in the US has spread to Europe. This is a new form of contagion, which transcends national boundaries and is amplified by an international crisis of confidence.

If Spain and Italy do look sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion. Portugal might follow Greece in a sovereign default and in leaving the eurozone.

All of these phenomena form a part of the dark side of the globalized world contamination, contagion, instability, interconnection, turbulence, shared fragility, universal effects, and overexposure. In this respect, one might speak of the epidemic character of our contemporary world.

Greece's exit from the eurozone would likely be less disruptive now than it would have been a few years ago. The countries most at risk of contagion Portugal, Spain, and Italy are less vulnerable now in the eyes of the markets the European Union has established a bailout fund and the European Central Bank has launched a large bond buying program.