The increased consumption expenditure typically reflected rapid growth in domestic credit, to a significant extent financed through foreign-capital inflows. Rising public spending often contributed to a widening of fiscal imbalances. These imbalances had adverse consequences. Among other things, they added to domestic price pressures, reduced competitiveness, and, along with rising private consumption, contributed to higher external deficits.
In some countries, inflation surged to double-digit levels, wage increases far exceeded gains in labour productivity, and there were excessive increases in asset prices, especially the price of housing. These external imbalances left the economies concerned extremely vulnerable to an external shock. That shock came in the form of an eruption of a crisis in the US subprime mortgage market in August 2007.