Emerging economies with open capital accounts are highly vulnerable to sudden shifts in global investor sentiment. A sudden reversal of international investment flows can trigger a financial crisis, a phenomenon known as a Sudden Stop.
The Sudden Stop Contagion Sequence
[Global Policy Interest Rates Spike] 
           |
           v
[Foreign Capital Abruptly Flees Local Assets] -> Drives capital flight back to safe havens
           |
           v
[Local Exchange Rate Drops Rapidly] -----------> Inflates foreign-denominated debt burdens
           |
           v
[Systemic Sovereign Default Wave] -------------> Realizes emerging market contagion shocks

To manage a sudden stop, central banks must use their foreign exchange reserves to stabilize the currency, deploy macroprudential buffers to protect the banking sector, and work with international institutions like the IMF to secure emergency credit lines.
 
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