Investors are reacting to the prospective Greek default and the inability of Europe's leadership to produce a coherent response that would prevent contagion to other peripheral euro-member countries.

The big market movements have been in equities and bonds as investors seek to quit risk exposures and secure their positions.

The interbank markets are displaying some anxiety but none of the distress that marked the peak of the global financial crisis.

The global banking system is still working, as are foreign exchange markets.

ANZ Bank chief executive Mike Smith observed on Friday that European wholesale funding markets had frozen, but markets in the US and Asia were still working.

Westpac found investors last week for a $1.15 billion residential mortgage-backed security (RMBS) issue and AMP successfully launched a similar $650 million raising.

RMBS issues were toxic around the world after the global financial crisis.

Foreign investors may talk about vulnerabilities in the Australian housing market, but enough are evidently persuaded by the minuscule default rates and the high yields on issues by good Australian names.

If you looked at currency markets, you would not be able to tell there was anything untoward going on.

The euro has been trading in a fairly narrow band from $US1.27 to $US1.34 since November.

Although it is at the bottom of that range now and heading lower, these are nothing like the panic moves seen in 2009 or even through last year.

The Australian dollar has also drifted lower, and is now 7.1 per cent below its March peak, but this too is a fairly modest move and in line with the softening in the terms of trade.

There is no sign of the wholesale withdrawal of funds by foreign investors desperate to plug funding gaps in their home markets which led to flight of capital from Australia in 2008 and 2009.

Indeed, foreign investors have been taking advantage of the lower Australian dollar to step up purchasing government bonds.

For all the political yapping about the government's spending pushing up interest rates, the 10-year government bond yield hit its lowest level in more than 100 years with Friday's low of 3.06 per cent below any trade since Federation.

Investors are not worried about returns. They want safety and they see it in an AAA-rated Australian government bond.

Yields are down by a full percentage point since last month and by two percentage points since July, when 10-year bonds were paying more than 5 per cent.

Markets still believed in the prospect of a steady economic recovery then. The clearest evidence of the new crisis in banking markets is the rise in the price of credit default swaps.

The price of insuring against default for the 12 biggest global banks has jumped from 255 basis points to 324 basis points since the beginning of this month and from only 200 basis points in March.

The cost of delivering certainty to investors has also risen for Australian banks, with CDS prices for senior debt for the Commonwealth Bank, for example, having risen from 130 basis points to 192 basis points, with a 13-basis-point move on Friday.

The widely followed ITRAXX index, which captures the price of credit default spreads for the leading 25 Australian stocks, has risen from 128 to 195 basis points in the same period.

It is a bigger move than the same index in Europe, and highlights investor fears about downside in the Australian market.

Interbank markets are reacting to the new global market mood. The spread between the 90-day bank bill and the market's forecast for the Reserve Bank cash rate in the same period has increased from 25 to 37.5 basis points. But, this is more a reflection of markets marking down the RBA's likely cash rate than any reluctance to hold bank bills.

The RBA has not felt the need to pump additional cash into the system. UBS interest rate strategist Matthew Johnson notes that the cost of overnight money for institutions that cannot deal directly with the RBA has risen to 25 basis points above the cash rate: a sign markets are alert, but not yet alarmed.

In Europe, although wholesale markets have closed for bank issuers, the banks are not in desperate need of funding.

After two rounds of lending banks as much three-year money as they want, the European Central Bank has largely taken care of bank funding needs. No one is borrowing, anyway.

Solvency, rather than liquidity, is now the pivotal issue for Europe's banks. There were reports of a run last week on the major Spanish bank, Bankia, despite it having been bailed out by the government only a week earlier.

The government denied there was depositor flight, and, although it is hard to tell the truth of the matter, there were no queues in the streets.