For Asia, the deepening debt troubles in the West are like a giant asteroid on a collision course -- too big to dodge or ignore, and difficult to pinpoint precisely where the worst damage will be done.
With roughly $3 trillion of reserves held in the form of U.S. Treasury debt -- more than $2 trillion in China and Japan alone -- Asia would be directly exposed to a U.S. debt downgrade or default. The sheer size leaves Asia with nowhere to hide.
"Where could these investors go to put that amount of cash to work? Answer: Nowhere," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York on Tuesday, July 19.
Government officials interviewed by Reuters said there was little they could do but watch, wait and hope for the best as Washington struggles to find a politically palatable agreement to avoid an Aug. 2 default and satisfy ratings agencies looking for proof of longer-term debt sustainability.
Indeed, some officials sounded more worried about risks emanating from Europe, where debt fears have spread beyond Greece, Ireland and Portugal to a much larger economy: Italy.
The biggest concern for Asia as a whole would be a global panic, similar to what followed the bankruptcy of Lehman Brothers in 2008. Asia fared better than the United States or Europe in that episode because its banks had little direct exposure and its public finances were healthy.
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