What is A Financial Contagion?

With the recent downfall of the Evergrande Groups, this expression has been heard on a recurring basis. So what does this mean?

Contagion is the propagation, usually associated with a disease – a negative situation that starts propagating and affecting more people. Here it is similar. Real Estate represents one-third of the Chinese Economy, and Evergrande Group is one of the largest if not the largest player in the real estate sector in China.

They are over-leveraged and sales plummeted, so they don’t currently have the ability to pay interest payments on debt, so they are defaulting. We mention financial contagion because companies that are direct service providers to Evergrande Group or providers or direct providers stop getting their money because Evergrande stops paying. Since they are a big player, this affects the overall economy, spreading out as a disease as everyone won’t get paid because they are going under.

Financial Contagion can have an effect outside the local country. Think about it: you can have service and product providers outside the country that are now left holding the bag and won’t get paid and they themselves if they subcontracted other service providers or asked for loans to carry out contracts to the “Big-Kahuna”, are now in trouble.