LONDON (Reuters) - Banks scrambled to increase the chances of Greece leaving the euro after Sunday's referendum, but euro markets only flickered and many investors doubted the `No' vote was the watershed moment some had feared.
Greece's rejection of the conditions its European creditors had demanded for releasing new loans was not what markets had assumed last week. But like so many other twists and turns in this six-month standoff, the market reaction was far from black and white.
The fall on Monday in the euro, euro zone blue chips and the government bonds of other southern euro zone countries such as Italy and Spain was largely within recent parameters.
Traders and investors posited four possible explanations for the muted reaction.
First, many investment funds believe the prospect of "Grexit" has now been so widely flagged that its shock impact is gone. Markets are largely priced to account for it and direct financial fallout from would be small anyway.
Second, a sizeable number of asset managers still believe Grexit can be avoided.
Third, many are convinced the European Central Bank - now armed with quantitative easing and a host of other bond-buying tools - will act swiftly and forcefully to douse any contagion.
And fourth, markets are simply too complacent and are vulnerable to a bigger shock as the effects of the first euro zone member to leave the bloc become clear.
"Maybe the market is more immune to contagion than we think. But it's been amazingly calm. There's effectively been no contagion at all, and I find that hard to believe," said Michael Michaelides, rates strategist at Royal Bank of Scotland.
RBS was one of a clutch of banks, including JP Morgan and Barclays, to come out after the referendum and say Greece's exit from the monetary union is more likely than not.
Goldman Sachs said a `No' vote, followed by a tightening of capital controls and Greece resorting to IOUs, would push 10-year Spanish and Italian yields up to around 3 percent and widen their premium over German yields to 200-250 basis points.
JP Morgan and Barclays also said the spreads would widen toward 200 basis points as investors grappled with the sudden realization Grexit could actually happen.
Perhaps tellingly, credit ratings firm Standard & Poor's also said it had upped its chances of Grexit but saw no direct ratings impact on other euro sovereigns.
In the event, Spanish and Italian yields rose 8 basis points by late afternoon to around 2.35 percent. The spread over Germany widened to 160-165 basis points.
At those levels, Spanish 10-year yields have risen more on 13 previous days this year and Italy's have risen 19. Similarly, euro zone stocks fell almost 2 percent but have fallen more seven times this year.
Reaction in foreign exchange was even more muted. The euro fell more than a cent below $1.10 early in Asian trading, but in afternoon trade in Europe it was down 0.7 percent. It has had 27 steeper daily losses this year.
This is all the more remarkable given how seismic the prospect of "Grexit" was during the first wave of the euro zone crisis in 2011 and 2012.
"Many were taking this referendum too literally," said Neil Williams, chief economist at Hermes Investment Management.
"Markets have yet to be convinced in full either that the exit door will be open or that the extent of any contagion from this could be irreparably damaging to the system," he said. "Greece still needs to default and restructure in or outside the euro."
Andrew Milligan, head of global strategy at Standard Life Investments, echoed that: "A `No' vote does not mean a Greek exit from the euro. A Greek exit is by no means certain."
Along with expectations of ECB support, it was also critical that, unlike 2012, the rest of the euro zone economy was growing at a reasonable pace, Milligan said.
Economists at JP Morgan, who now put the chances Greece will leave the euro at two in three, said in a worst-case messy Grexit, the ECB could pump an extra 1 trillion euros of bond-buying stimulus into the system on top of the 1 trillion it has already committed to. That might push the euro down as much as 10 cents.
Analysts at Barclays echoed a common sentiment that financial market contagion will likely remain "limited and manageable" thanks to the ECB. But they highlight a potentially "insidious" channel of contagion if Greece leaves the euro.
"It would change the nature of the currency union and would undermine the credibility of its irreversibility in the medium-term for investors in the real economy," they wrote in a note.
A deal between Greece and its European creditors might be more likely after Yanis Varoufakis, Greece's controversial finance minister, resigned on Monday morning, removing a major obstacle to an agreement.
In response to the referendum vote and Varoufakis's resignation, UK bookmaker Ladbrokes lengthened the odds on Greece leaving the euro zone this year to 7/4 and shortened the odds of it staying in the currency bloc to 2/5.
Those odds imply a roughly 60 percent chance Greece will stay in the euro this year and a 40 percent chance of Grexit.
Reporting by Jamie McGeever; Editing by Larry King