However, this scenario essentially a reprise of the 2008 financial crisis, which knocked 39 percent off the value of the rand is far from certain given the growing view that risks in established markets may be just as high as in emerging ones.

"It's not clear to me that a deterioration of the Europe situation will lead to a sell-off," said Chris Hart, economist at Investment Solutions, a Johannesburg-based fund manager.

"If anything, investors will need to park their money somewhere and emerging markets, with their high yields, could be the place."

South Africa's budget deficit is 5 percent of GDP for 2011/12, which is too high, but the government has outlined a credible plan to cut that to 4 percent by 2013, and its total debt stock is just over a third of GDP, making it relatively attractive to investors fleeing, say, a Greek default.

The fact South African bonds are performing so strongly at present and the rand hit a two-month high of 6.625 to the dollar last week suggest some are already making this calculation.

"I'm not advocating that South Africa would continue to rally if things deteriorate but it would not be a crisis," said Di Luo, regional fixed income strategist at HSBC, adding that real yields made South Africa an appealing option.

"I don't think investors would punish South Africa indiscriminately.

"True to form, those overseeing Africa's biggest economy are bracing for the worst, with Finance Minister Pravin Gordhan saying in a newspaper column last month that South Africa would not escape unscathed from a deeper euro crisis.

Similarly, new Treasury Director General Lungisa Fuzile warned this week of a spike in borrowing costs now at 9-month lows should the debt situation in Europe deteriorate.

Sharply higher bond yields would put pressure on the central bank to raise its benchmark lending rate from three-decade lows of 5.5 percent, potentially killing off an already sluggish economic recovery.

Analysts, however, think policymakers may be over-doing the doomsday scenario.

"The Reserve Bank and Finance Ministry are overplaying the risk. South Africa is much more of a safe haven than these other countries," said Peter Attard Montalto, emerging markets analyst at Nomura International.

"I don't think they'll be selling their debt because of what happens in Europe," he added.

"The fiscal situation and debt levels make South Africa more of a safe haven."

That is not to say Pretoria can relax.

As an economy, South Africa is far too reliant on foreign portfolio flows, the lion's share of which goes into liquid assets such as stocks and bonds, which can easily be dumped, rather than bricks and mortar, which cannot.

For example, in 2010, offshore funds poured 107.9 billion rand ($16 billion) into South African stocks and bonds, compared to just 11.4 billion rand in direct investment.

"Unfortunately in this sort of global environment where South Africa like other emerging markets has been the beneficiary of sizeable foreign flows the risks are heightened because the country still faces this big mismatch of foreign direct investment and portfolio investment," said Razia Khan, head of Africa research at Standard Chartered.

"Just because we have not seen a correction in recent times means that sell-off may be great in its magnitude when it does take place."

Copyright Reuters, 2011