Greece ordered it banks to close today to abort a run on the entire banking system. Depositors, fearing default and the loss of their money, have been getting their deposits out while the getting was good. Fear in financial markets is highly contagious. There’s a reason these sorts of events are known as panics. Something similar happened in this country in the late winter of 1933, before Franklin Roosevelt’s inauguration, with the same governmental response. The Greek central bank also imposed limits to keep an increasing flood of money from leaving the country.

Stock markets sank on the news (but then rebounded somewhat) while such safe-harbor investments as U.S. and German government bonds ticked upwards. German ten-year bonds are currently yielding a piddling .79 percent while Greek bonds tumbled so badly that the falling price pushed the yield up to an astonishing 33 percent.

The Eurozone foreign ministers have said no more and Greece is expected to default tomorrow when a large debt payment is due that Greece cannot meet. The European Central Bank has also limited its support to the Greek banking system.

The Greek government is under intense pressure. On the one side, its foreign creditors are demanding austerity in exchange for more aid so that Greece can meet its financial obligations. On the other, the Greek population is demanding business (and government largesse) as usual. The government has proposed a referendum on whether to accept austerity.

If Greece goes into default and is kicked out of the Eurozone (to which it should never have been admitted in the first place, of course), it would have huge and immediate consequences for Greece, as all sorts of financial chickens come home to roost. But Greece is a very small country with a population of less than 11 million and a GDP of $204 billion, barely more than 1 percent of U.S. GDP. So the consequences outside of Greece would be limited.

The main problem would be, again, the highly contagious nature of financial fear. If Greece goes, what might happen to Italy, Spain, and Portugal, which also have large debts and dubious credit?

It’s going to be an interesting summer.

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