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Globalization has been the theme directing the future Yet as Mr Henry M Paulson chairman and CEO of Goldman Sachs Group Inc recently acknowledged national and regional markets are linked only in precarious ways leading to weak spots within the economy and fueling the possibility for regional or even worldwide financial crises Peck Ming 128 p1 In just the past 12 years three major crises have caused tremors felt around the world All three examples represent incidences of contagion or the interaction between financial sector crises and balance-of-payments crises in which a loss of investor confidence may set off vicious cycle of capital flow reversals a liquidity squeeze and a depressing currency Internet 2 p 2 And all three help illustrate the need for a remaking of the international financial architecture in order to prevent future occurrences of contagion Garten 129 p 1Contagion no doubt remains a fuzzy topic for which no single definition exists Most scholars and economists agree that contagion is the transmission of a crisis that is not caused by the affected countrys fundamentals but by its proximity to the country where a crisis occurred By proximity academics refer to one of two situations First real integration contagion occurs when a devaluation and financial crisis in one economy worsens the competitiveness of others and lowers the trade balance thus devaluing those currencies The strength and speed to which such a crisis spreads is directly related to the strength of the trade and investment link The second deemed financial integration contagion occurs when a crisis in one market convinces investors to pull out from other markets either to raise cash for redemptions or balance their portfolios or to follow investors to reduce losses in closely integrated financial markets therefore raising the probability that those markets will also suffer a crisis Internet2 Fratzscher 1216 p3 The second form suggests that investors often invest without complete information and often apply the problems of one
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