This occurs when there is a sharp reduction in the amount of foreign currency entering the country and/or an increase in outflows, leaving insufficient foreign exchange to pay for imports. This is typically the result of a reversal of capital flows and/or capital flight (transfers of money out of the country), often coupled with a reduction in export earnings owing to price decreases or loss of markets. Such crises are associated with the rapid increase in volatile flows of international capital that have characterized the current phase of globalization.
Financial crises can spread rapidly between countries, both within and between regions, through their direct effects on other economies and by undermining creditors' confidence in other countries that they see as similar. This process is reflected in international contagion theory, a term used to describe the way that an event or crisis in one country is replicated or influences crisis in others. It has also been used to describe the transnational impact of environmental disasters and population movements.
A financial crisis causes a sharp and prolonged reduction in income, government revenues and the exchange rate, which increases poverty, reduces the resources available for health services and makes imports (e.g. of pharmaceuticals and, in some cases, basic foods) more expensive. There has been a succession of financial crises in middle-income developing countries since the mid-1990s, in Mexico, South East Asia, Russia, Brazil and, most recently, Argentina.