However, the realisation that countries in the Euro were not immune meant investors demanded higher bond yields. Previously investors felt Euro bonds were very secure. However, this change in market sentiment and loss in confidence caused investors to lose confidence in other Eurozone debt markets. (Greece is not on this graph, but Greek bond yields rose to over 25% in Jan 2012. Firstly, investors sold Greek bonds, causing a rapid rise in Greek bond yields. In 2011, when investors realised Greece was at risk of insolvency and bonds were at risk of default, it changed market sentiment. One major manufacturing firm closes down this causes unemployment, outward migration of labour, other firms going out of business, declining real incomes. Asia caused international investors to lose confidence and sell similar currencies in other Asian economies. Credit crunch 2007/08 – a shortage of finance in the US spreads throughout the world and to all banks.Debt crisis – 2012-13 Bond yields rise in Greece, causes rising bond yields in other Eurozone economies.In economics, the domino theory is often used to explain how an economic problem in one country can spread like a contagion or domino effect to similar countries and firms.Įxamples of the domino effect in economics Knock one domino over, and you don’t just affect the first domino, but all the ones who stand in its path. The domino effect refers to how one action can have a knock-on effect to related subjects.

Domino effect definition