REFILE-CEE MONEY-First in firing line, east Europe braces for Grexit

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* Greek euro exit looks set to trigger Lehman-like selloff

* No CEE assets would be immune to spike in risk aversion

* CEE markets still haven't recovered from sharp 2008 falls

By Jason Hovet and Carolyn Cohn

PRAGUE/LONDON, May 31 (Reuters) - A Greek exit from the euro
zone could thrust emerging European markets into a downward
spiral similar to that seen during the 2008 financial crisis,
when currencies lost up to a third of their value following the
collapse of Lehman Brothers.

Europe's eastern currencies are among the world's 10
worst-performing against the dollar this month, alongside
Syria's pound and better only than the kwacha of Malawi, where
authorities scrapped the unit's peg to the dollar.

Policymakers across the region have taken pains to stress
defences are stronger than four years ago, when the Polish zloty
lost 32.5 percent against the euro in the six months after
Lehman and stock indices were cut in half.

Investors have already shifted positions in anticipation of
Greece's possible exit from the euro zone following a June 17
repeat election, and what investors fear would be a knee-jerk
selloff of Polish, Hungarian, Czech, Romanian and other assets.

"I would not rule out a similar market reaction to what
happened in the fourth quarter of 2008," said Thanasis
Petronikolos, head of emerging market debt at London-based
Baring Asset Management, which runs a $140 million fund that has
a third of its assets in emerging Europe, Russia and Turkey.

"If Greece exits, then what happens to countries like
Portugal, Ireland, Spain or Italy? Then ... we are into an
uncharted territory."

ROADS TO CONTAGION

A harsh escalation of the euro crisis would hit growth in
the east's export-dependent economies harder than other
developing states, due to their close integration with their
bigger neighbours and dependence on western European demand.

Another potential source of pain is deleveraging by the
western-owned lenders that own around 70 percent of banking
assets in the region.

A hit to exchange rates would cause payments on foreign
currency loans held by Polish and Hungarian households to
skyrocket, pushing up bad loans and intensifying losses.

Aware that the main channel of contagion remains capital
markets, politicians are bracing for turmoil.

"I expect the very high volatility on foreign exchange
market to continue until results of the Greek elections," Polish
Deputy Finance Minister Dominik Radziwill told reporters earlier
this month. "The outcome will have a huge impact on the euro
zone, even polls may affect the euro and, in effect, the zloty."

Added Hungarian Prime Minister Viktor Orban: "We cannot
exclude ... that there will be serious shock waves."

A Greek exit from the euro would technically have little
direct effect on the 17-member bloc's economy, of which the
Mediterranean state makes up just a tiny fraction.

But it would drive up debt yields for other euro zone states
and their neighbours, by prompting a stampede of investors to
assets perceived as more safe while the single currency's other
members try to forestall a domino effect.

In a poll earlier this month, economists were almost evenly
split on whether Greece would leave the euro, although in a
Reuters poll published on Thursday, 19 of 30 fund managers said
Greeks would still be using the euro at the end of next year.

DOWNWARD SLIDE

Emerging European assets rallied to start 2012 but have
retreated since Greece's inconclusive May 6 election.

Following one of its best quarters in a decade, the zloty
has lost 4.9 percent against the euro in May. It has
recovered only around a third of its post-Lehman drop since
hitting 4.93 per euro in February 2009.

The forint, punished for Hungary's slow progress
in securing a new EU/International Monetary Fund credit line, is
down 4.8 percent for May and is hovering around its 2009 levels
after hitting an all-time low of 324.2 per euro in January.

Romania's leu hit a record low last week, and the
region's stock markets are down 6.7-12.5 percent in May, far shy
of the 40-50 percent shed in the weeks after Lehman's demise.

The losses are still a shadow of those seen immediately
after the collapse of Lehman Brothers, reflecting a retreat by
investors rather than a full-scale withdrawal, but market
players they would accelerate if a major event such as a Greek
euro exit happens.

Data from Thomson Reuters Lipper show funds listed in
emerging Europe bond and equity categories saw net outflows of
an estimated $923 million over the first four months of the year
- before this month's selloff.

Jiri Lengal, who manages $190 million in CEE funds for
Investicni Spolecnost Ceske Sporitelny in Prague, said he has
cut some risky positions and increased cash in his portfolio.

He sees a potential rebound after next month's Greek
election, saying "Greece will not commit suicide", but said he
is in a scarce minority.

"I think the pessimist camp is much stronger than the
optimist camp," Lengal added.

If the Greek election does lead to Athens' departure from
the euro, countries with high current account deficits, like
Turkey, or where debt is high, like Hungary, would come under
strong pressure, said Baring's Petronikolos.

London-based strategist Thanos Papasavvas, for Investec
Asset Management, said he has moved to the sidelines in currency
markets.

He is overweight Czech debt - seen as a regional safe haven
- and underweight Poland "given the large component of foreign
participation and high liquidity.

"Given the underlying uncertainty we remain cautious on our
positioning," Papasavvas said.

(Additional reporting by Jan Lopatka; Editing by Michael
Winfrey and Catherine Evans)