SINGAPORE Averting a U.S. debt default solves only the immediate fiscal problem for the West and its big creditors in Asia.
The U.S. sovereign debt path remains unsustainable. Investors are growing reluctant to lend cheap money to a handful of European countries. Either of those could erupt into another bout of market-bruising uncertainty.
A Reuters examination of Asia's finances shows the region as a whole boasts healthy government balance sheets, with vast amounts of reserves on hand to counter any sudden reversal of investment flows.
Some countries such as Singapore and China are already taking steps to cut their exposure to the U.S. dollar, and Washington's brush with default may hasten the shift.
But there are a few vulnerable spots. In Taiwan, for example, foreigners hold $480 billion worth of stocks and bonds, eclipsing the country's $400 billion in reserves. In South Korea, foreigners hold almost $450 billion in stocks and bonds, well above its $304 billion in reserves.
New Zealand and Malaysia also have foreign stock and bond ownership that outstrip reserves.
A sovereign debt crisis in the West could spark a sudden withdrawal of that foreign money, much like it did after the Lehman Brothers bankruptcy in 2008.
The debt deal that President Barack Obama announced in Washington on Sunday appeared to neutralize the immediate U.S. default threat. Next on the worry list -- at least chronologically -- is the growing number of European economies struggling to borrow at affordable interest rates.
Spain and Italy have paid much higher rates to sell their debt in recent weeks, feeding worries that the euro zone's debt troubles won't stop with Greece, Ireland and Portugal.
Although Asia is more exposed to U.S. government debt than European, it is more reliant on European banks than American ones for private financing.
European banks' total claims on Asia, excluding Japan, were $1.3 trillion as of the end of 2010, more than three times that of U.S. banks, brokerage Nomura estimated.
Should the situation in Europe worsen, banks might pull funding with little warning.
Robert Prior-Wandesforde, a Credit Suisse economist based in Singapore, said another banking crisis in the Western world was "highly likely" and it was easy to envisage this leading to a credit crunch in Asia.
He listed Hong Kong, Singapore, Taiwan and South Korea as the region's four most at risk to a sudden flight from a banking crisis, but all of Asia would suffer from the accompanying drop in global confidence and demand.
"In short, the region would do very well to avoid a credit crunch," he said.
LINKING TO A SINKING DOLLAR
As long as the West avoids a fresh crisis, Asia could see more foreign investment money pour in, drawn by its strong growth rates and healthy public finances.
"There is evidence that investors all over the world are looking at emerging markets as safe havens rather than the U.S. dollar or U.S. Treasuries," said Mark Mobius, Singapore-based executive chairman of Templeton Asset Management's emerging markets group.
Some government officials in the region concur, and are directing more of their holdings toward emerging markets.
Singapore's $300 billion state-run investment fund, GIC, said last week it had cut its investment in developed markets to 34 percent of its portfolio in the fiscal year that ended in March, down from 41 percent. It increased its investment in emerging market equities to 15 percent from 10 percent.
Not surprisingly, China stands out in Asia as the most exposed to the U.S. dollar but also the most prepared to withstand a financial blow. With $3.2 trillion in reserves, it is hard to imagine any scenario where an overseas crisis wipes out that cushion.
China's problem is that an estimated two-thirds of that pot is invested in dollar-denominated assets, and economists widely expect the greenback to weaken in the next few years.
China's foreign exchange regulator made it crystal clear last week that it intends to shrink the dollar exposure. In an announcement on Thursday which was overshadowed by the U.S. debt drama, the State Administration of Foreign Exchange said it would press ahead with diversifying reserves.
One sentence in SAFE's comments stands out: "We will take comprehensive measures to promote economic restructuring and transform economic development, to fundamentally slow down the foreign exchange inflow, and to promote a better balance of international payments."
In other words, China's reserves growth will slow, and so will its need to buy U.S. Treasury debt. That is a worrisome development for Washington, which will need to entice other investors to pick up the slack.
The debt deal that Obama outlined was short on details of how the United States would cap rising healthcare costs, the largest single threat to fiscal stability as its population ages.
Beijing's latest five-year economic plan calls for enhancing the social safety net and raising the minimum wage by 84 percent, which should spur higher consumption. Consumer spending accounts for roughly a third of China's economy, less than half the share in the United States.
Morgan Stanley Asia's non-executive chairman, Stephen Roach, said China was "moving now to embrace a new model which will stimulate internal private consumption."
"They are moving away from the dollar whether we like it or not," Roach said in an interview with Reuters Insider.
(Additional reporting by Saeed Azhar in Singapore; Editing by Mathew Veedon)