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The tendency of investors to doubt the solvency of some firms or countries when others are in trouble. Default by one bank, for example, may trigger a run on other banks, or default on its debts by the government of one less developed country may make it harder for others to borrow, even when there is no objective evidence to justify this. Fears of contagion may force central banks to support institutions in financial difficulties which they would otherwise leave to their fate, or induce the International Monetary Fund to assist countries whose policies they do not regard as completely satisfactory, to avoid the greater evil of widespread financial collapse. See also systemic risk.


Reference: Oxford Press Dictonary of Economics, 5th edt.