Greece's nightmare has begun, and it's getting worse

The economy in Greece has begun its descent into the fiscal abyss as the government of Prime Minister Alexis Tsipras initiated capital controls on Monday. Economists say that will cause serious problems even if a last-minute deal is reached to prevent the cash-strapped country from defaulting on its international debt obligations.

Banks in Greece are expected to stay closed this week. Lines have formed at ATMs throughout the country because Greek citizens can withdraw only 60 euros ($67) per day. Greek businesses are having a difficult time operating without easy access to capital. The government in Athens has said it won't make a 1.66 billion euro payment ($1.77 billion) due Monday to the International Monetary Fund. The country's bailout also expired on Monday.

U.S. investors are growing increasingly uneasy about the situation and hammered stock prices on Monday. The Dow Jones industrials index fell 350 points, the S&P 500 tumbled 44 points and Nasdaq lost 122. Most experts still think a last-minute deal to avoid a Greek default is possible, but they're becoming skeptical that's possible now.

"The capital controls are going to slam the breaks on economic activity in a country where non-performing loans already account for more than 30 percent of banking portfolios," wrote Erik Jones, professor of European Studies and International Political Economy at Johns Hopkins University's School of Advanced International Studies, in an email to CBS MoneyWatch. "There will be a number of payments missed both to creditors and to suppliers. This will trickle down across the whole of the economy. The damage will be immense, and the banks will suffer worst of all."

Even if capital controls are only temporary, it will be a "long time" before credit conditions return to the point where they were before the latest crisis, which wasn't that good either, according to Jones. Mark Zandi, the chief economist at Moody's Analytics, echoed Jones' views.

"Clearly, this is going to do a lot of damage to the Greek economy," he said. "The banking system is in tatters. Credit will be very difficult to come by for businesses and households. This has to be shattering confidence."

Indeed, Zandi noted that Greece wouldn't be in technical default if it skipped its IMF payment. Countries in that situation are given a 30-day grace period to make good on their past-due obligation. And Cyprus, Argentina and Iceland have implemented similar capital restrictions in recent years when their banks faced difficulties similar to Greece's.

Tsipras, who was elected on an anti-austerity platform, stunned his country's creditors over the weekend when he called for a referendum on the latest bailout plan. Greek business leaders were also flabbergasted by the decision, according to Constantinos Michalos, the president of the Central Union of Greek Chambers of Commerce. He told CNBC on Monday there aren't enough paper ballots for the election. He added that it's "extremely difficult" for his members to operate with the banks closed.

Tsipras is urging his fellow citizens to vote against the bailout, arguing that the creditors' demands are too harsh. Not surprisingly, creditors and officials in Europe are urging Greeks to vote yes.

The situation in Greece is becoming more dire. If Greek banks had remained opened Monday, they would have collapsed because they would have run out of money, according to Peter Ireland, an economist at Boston College.

"It is undeniable that it's terrible for ordinary Greek citizens, but what it does is buy a little more time so that some resolution can be reached," he said.

Greece's economy has been in a shambles for the past six years, with economists comparing its conditions to those that existed in the U.S. during the Great Depression. Greek unemployment tops 25 percent, and tax evasion is rampant. Both Greece and its creditors have said that they want to avoid a Greek exit from the euro currency even though some economists have said it was mistake from Europe to have included Greece in the currency membership in the first place.

"Allowing Greece to slip out of the eurozone would be catastrophic for Greece and just a colossal mess for Europe," said Zandi, who noted that he gave it "even odds that they will pull it out of the fire before there is a default. I don't say that obviously with any confidence."

Like money in Greek banks, confidence is clearly in short supply right now.