LONDON (Reuters) - For all the firewalls Europe put in place over the last three years, the actions investors say they would take if Greece left the euro currency bloc suggest the ensuing panic would rumble through financial markets.
The imminent launch of a bond-buying scheme from the European Central Bank has so far quelled the anxiety that in 2012, when Greece last looked set for the exit, prompted a steady stream of money out of the euro zone.
But this could quickly change if the current stand-off between the new anti-austerity government in Athens and its international creditors shifts the balance of probability towards Grexit.
Investors say the euro would take a hammering as foreign funds sought shelter in U.S. and British assets, euro zone stocks would fall, and borrowing costs in the bloc's low-rated countries would soar as those obliged to stick with Europe tried to stem losses by buying German government bonds.
"A lot of international investors would use it as an opportunity to just sell to the ECB and leave the euro area, similar to what we have seen before," said Patrick O'Donnell of Aberdeen Asset Management, a fund with over 400 billion euros under management.
Before talks on Friday which could be the last chance for Greece to grab a financial lifeline before its bailout expires on Feb. 28, Austrian Chancellor Werner Faymann said no one could calculate the possible contagion from a Greek exit.
U.S. investment bank Morgan Stanley had a stab this week, advising clients how to limit losses in such an event - ranging from staking bets on the euro weakening and U.S. and British bond yields falling, and insuring banking stocks against default.
But there is little evidence as yet of investors protecting themselves against a Grexit threat.
The latest Reuters polls show only 25 percent of economists think Grexit will happen this year, far less than the 90 percent chance Citigroup attached to such an outcome at the height of the debt crisis in 2012.
Markets, outside Greece, have barely stirred even with anti-austerity parties in the likes of Spain and Ireland also rising to prominence.
Aberdeen's O'Donnell remains heavily invested in the bloc's low-rated peripheral bonds, waiting for the ECB to buoy prices further when it launches quantitative easing in March.
Gareth Colesmith, a portfolio manager at Insight Investment, said that without the prospect of the ECB's scheme, borrowing costs in the bloc's other weak links - Portugal, Italy and Spain - would already be a lot higher.
This is was what happened in 2012, as investors became convinced that Greece leaving would create a domino effect eventually resulting in a break-up of the union and a return to pre-euro currencies.
Since then, the ECB has pledged to do whatever it takes to save the euro, Europe's financial system has been through a comprehensive health check, and the ECB has unveiled QE, which many see as a road-map towards debt mutualisation.
But, says Insight's Colesmith, it may not be enough.
"If the shift of investor sentiment is sufficiently large, it will only cushion the blow rather than prevent it."
International funds could pull investments out of the euro area, exacerbating a fall in the currency that could see it tumble towards parity with the U.S. dollar.
Hedge funds may then start to prey on countries most likely to follow Greece out the door. Portugal, the only other country to have junk-rated debt, is an obvious candidate.
Unlike in 2012, potential political contagion could also become a factor in investment decisions.
Spain too could be targeted with the Podemos party - a hard-left ally of Greece's Syriza - leading the polls before elections in December.
"It would be very much a case of picking off the weakest members of the herd," said Kerry Craig, global market strategist at JPMorgan Asset Management.
For some investors, a post-Grexit selloff could have a silver lining. Julien-Pierre Nouen, chief economist at Lazard Frères Gestion in Paris, said that with European growth improving, signs of banks lending again and QE in prospect, the firm remains overweight euro zone equities.
"We would be buyers on any market weakness. If the market falls by 10 percent we would certainly be buyers," he said
Money managers that have to remain invested in the bloc, would initially turn to the safest assets if the bloc fractured.
Many would buy German government bonds - an uninviting prospect when easy central bank policy has driven yields on much of this debt below zero, effectively meaning investors are paying for the privilege of lending.
"It is really a question of fear versus greed a lot of the time in financial markets and, if fear takes over, bonds will be bought even at these levels," said Mark Dowding, a portfolio manager at London-based fund Bluebay.
(This story has been refiled to correct in the tenth paragraph to read "anti-austerity parties", not governments)
(Additional reporting by Francesco Canepa, Anirban Nag and Marius Zaharia; Editing by Nigel Stephenson and Peter Graff)
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