Abstract A version of the Kiyotaki and Moore (J. Political Econom. 105 (1997) 211) model of credit cycles is used to examine the extent to which a crisis in a country can spread to another seemingly unrelated country. The model features two small open economies that face credit constraints and produce a differentiated commodity which they export to a large country. A productivity shock to one of the small open economies triggers an adverse terms of trade shock to the other which is then amplified by credit constraints. The paper provides a new perspective on the relationship between terms of trade shocks and the balance of payments that differs from existing models which focus on risk sharing and consumption smoothing. In particular, it is shown that if financial frictions are present, a temporary terms of trade shock can trigger capital outflows and a rapid deterioration in the current account.