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Greece – How will Greece vote in Sunday’s referendum?

Large parts of the world are still struggling with the burden dumped on their shoulders by the financial crisis – even now, eight years after its onset.

And there are dangers not far beneath the surface that could easily cause a new setback.

Even if those risks don’t materialise, the outlook for this year, the IMF has said, is economic growth that is only “moderate with uneven prospects across the major countries and regions”.

The recovery from the financial crisis and the Great Recession of 2008-09 continues and some areas do seem to be gaining some strength. The US is a notable example and there are signs that the eurozone may be putting the worst behind it.

But the global economy is still struggling to regain the momentum it had in the last decade, before the crisis. And then there are the risks.

The most topical case is the eurozone and the never-ending crisis in Greece. The latest developments suggest the eurozone will avoid, at least for now, the turbulence that a Greek abandonment of the currency might cause.

It is, however, a risk that remains lurking in the background. The mainstream view among eurozone governments and investors is that an exit would be very bad for the Greek economy and financial markets. But they think contagion to other parts of the eurozone, never mind beyond, would be containable.

Eurozone financial markets did wobble significantly at the start of the week, but then regained their composure. It’s the bond market, where government debt is traded, which is where contagion to other countries’ finances could take place.

There were moves in the direction you might expect if contagion were an issue – higher borrowing costs for Spain, Italy and Portugal and lower for Germany – but they were too small to be a problem. So far all countries bar Greece have borrowing costs in the bond market that are affordable.

That’s not a universal view, however, and the US administration in particular has been wary about eurozone developments. The Treasury Secretary, Jack Lew, has repeatedly pressed European leaders to reach an agreement to keep Greece inside the eurozone.

Full coverage: Greek debt crisis

US interest rates

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Anything Fed chair Janet Yellen says about interest rates is closely watched by the markets

A bigger preoccupation for financial markets over the last year has been US interest rates. The Federal Reserve’s main rate target is close to zero (actually a range of zero to 0.25%). It has been there since December 2008 in the depth of the recession.

The Fed will raise rates, probably later this year. The economy is recovering and unemployment has fallen far from its peak. Certainly, inflation is very low and the jobs market is not as healthy as the headline unemployment figure suggests. But that just means the Fed will not raise rates very quickly once it has made a start.

The big concern about the rise when it comes is the potential impact on financial markets, especially in emerging economies. Higher interest rates in the US will encourage investors to move money back there, money that went overseas in the first place because rates were so low.

If that does happen it could force down the prices of the assets and the currencies that those investors sell. When they sell bonds – which are a form of tradable debt – a fall in the price is in effect an increase in local financial market interest rates.

So the Fed move could lead to higher borrowing costs and a weaker currency, for many emerging economies, which in turn could mean higher inflation – because a declining currency makes imported goods more expensive.

We have already had one episode of this – it was known as the “taper tantrum”- when the then-Fed chairman Ben Bernanke signalled plans to cut back (taper) the quantitative easing programme of buying financial assets. It caused significant turbulence in a number of emerging economies, though they got through the episode without any major upset.

Would they survive unscathed again? Perhaps, but there are risks and some economies are seen as a little vulnerable – South Africa, Turkey and Brazil, for example.

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