As Greece shuts its banks and imposes capital controls, stressmeasures in financial markets show the threat of contagion islimited.

While Greek bank bonds tumbled and a credit-risk benchmark inEurope jumped, indicators of banking stress across the continentand in the U.S. suggest relative calm as concern mounts that Greecewill exit the euro. The U.S. two-year interest-rate swap spread, akey measure of risk for banks, rose Monday only to a high matchedlast week.

The relatively muted effect on markets reflects investors'confidence in firewalls erected to contain the fallout of apotential Greek default during months of debt talks. The EuropeanCentral Bank (ECB) has already been buying bonds under itsquantitative-easing program and has additional crisis tools putin place in the past few years.

“There isn't the immediate knock-on effect for banks across theworld, as they really don't hold Greek debt,” said Peter Tchir,head of macro credit strategy in New York at Brean Capital LLC.“The ECB is going out of its way to support even Greece, and hasmuch more tools and willingness to respond and also support Spainand Italy. So, the contagion risk is far lower.”

Greece's Capital Controls

Greece imposed capital controls early Monday, shutteredfinancial markets, and closed banks until at least July 6, the dayafter Greeks will vote in a referendum on proposals needed torestore bailout aid. Prime Minister Alexis Tsipras called for thevote before the June 30 expiration of the current bailout and aUS$1.7 billion payment due to the International Monetary Fund.

The Bloomberg U.S. Financial Conditions Index, meanwhile, stillshows a favorable backdrop in markets. The measure, which combinesseveral closely watched gauges of stress across bond and equitymarkets, was 0.386 on Monday, down from 0.54 on June 26 and up from0.107 in January. A positive reading indicates risks arelessening.

“This has been on the agenda for such a long time so thecontagion that was feared a number of years ago seems unlikely,”said Zane Brown, a fixed-income strategist at Lord Abbett & Co.in Jersey City, New Jersey. “We have not seen any evidence in termsof higher credit default spreads by other countries or by theirbanks.”

The difference between the rate on a two-year interest-rate swapand Treasury yields, the swap spread, rose to 24.56 basis pointsMonday, the highest since June 22. The gauge reached 167 basispoints in October 2008 amid the global credit freeze that followedthe collapse of Lehman Brothers Holdings Inc.

While global equities fell Monday as investors fled riskyassets, the euro erased its losses against the dollar onspeculation the fallout from Greece will be contained.

A measure of how much banks expect to pay to borrow in euros,known as the FRA/OIS spread, rose to 15 basis points on Monday.That's still less than a quarter of the 80 basis points reached atthe end of 2011 and down from 18 basis points on June 15.

“It's in no one's interest to let the system they spent the lastthree years trying to salvage to go quickly and easily,” BreanCapital's Tchir said. “This time, you won't have a situation thatone default causes all these cross defaults. People have alllearned so many lessons.”

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