Financial Markets Contagion

Financial market
The financial market is an en elaborate markets that encompass the money market and the capital market. The money market facilitates short term borrowing whereas the capital markets provides for long term lending.

Financial market Interconnection
Advances in information and communication technology has seen many financial markets become interconnected and more often information released in one place will be replicated in other markets either positively or negatively depending on the nature. In Kenya, the regulators have been asked to be vigilant against the possibility of Kenya being affected by the financial crisis currently facing other parts of the world.

Financial contagion
Financial contagion refers to the phenomenon when one country's economy is negatively affected because of changes in the asset prices of another country's financial market.One particular example of this can be seen during the Asian financial crisis of the late 1990s. A more recent crisis where disruptions quickly spread into other areas of financial markets is the Subprime mortgage financial crisis in August 2007.

Subprime Virus
The subprime virus has gone global. Starting as a localised outbreak in the US market for risky subprime mortgages, it has spread into the supposedly safer markets and even into prime mortgages. Meanwhile, it has crossed into other loan species – particularly leveraged lending, where ballooning spreads have rattled the market and left banks holding big chunks of debt.

Effects
Those with bad leveraged bets face falling collateral values, tighter lending from prime brokers and illiquidity in some assets. That is probably exacerbated by investors seeking redemptions after two Bear Stearns funds blew up in June. That can force a fire sale of assets or a redemption freeze and more fear. more

Kenya financial market
Here in Kenya, although analysts concede the probability of contagion is low, the call is being made in view of the fact that foreign investors have increasingly been looking at the Kenya’s financial markets as a safer alternative to the developed and emerging markets where there has arisen a crisis resulting from failure of risky and poorly structured mortgage dubbed “sub-prime mortgages” market.The Central Bank of Kenya, Capital Markets Authority and the Nairobi Stock Exchange and Treasury are institutions that are in one way or another involved in monitoring of developments in the financial markets.

Emerging markets (EMs) Capital Markets
EMs far from the source of the initial shock can be victims though they are innocent bystanders. Because contagion is possible and likely for emerging markets the cost of capital market contagion could be major.

Big Q
The question is whether the contagion, which started in US housing, spreads back from financial markets into the real economy.