POLSCI 160 Lecture Notes - Lecture 8: Foreign Direct Investment, Credit Default Swap, Credit Crunch

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Cross-border investment can improve welfare in both countries. Common and competing interests: both lenders and borrowers want to cooperate to maintain capital flows, but they can conflict over the distribution of risk and return. Financial ties can make societies mutually vulnerable (ex: financial crisis 2008 and the current greek debt crisis) International institutions like the imf structure interactions, but their role is controversial. New financial products: credit-default swaps (slivers of mortgages bundled together) People borrowed a lot, in this country as well as in the eu and major debt crisis hit europe. Ireland, spain - housing bubble (similar to us"s situation) Had to borrow from abroad in order to avoid a major banking crisis; need to stimulate economy and borrow. Portugal, greece - deficits covered by foreign borrowing. The greek government borrowed even more than the average government. Now greece has to pay back what it owes using a bureaucracy that is not working.

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