Moderate impact of European crisis on Asia: S&P

Deteriorating funding conditions for a number of Eurozone sovereigns have spurred numerous questions about how these developments could affect Asia's economies and sovereign ratings.

In a credit FAQ, Will Europe's Confidence Crisis Spill Over Into Asia?, Standard & Poor's c redit analyst Elena Okorotchenko says, "The main channel of contagion is likely to be through higher funding costs. That said, we don't expect the same degree of deterioration in funding conditions for Asian sovereigns."

"Among Asian sovereigns with relatively high debt burdens, Japan, India, and Taiwan borrow mostly domestically and are unlikely to experience the same volatility in investor sentiment as those borrowing externally," Okorotchenko added.

If financial turmoil persists in Europe, Asian sovereigns that borrow internationally could pay more on their commercial external debt, at least for a time, . Okorotchenko said.

"Sri Lanka, Pakistan, and Mongolia have significant external borrowings. However, these three countries' IMF programs and the volume of bilateral and multilateral loans they receive partly shield them from the volatility of market interest rates," she said.

If the current situation leads to a wider economic slowdown in Europe, Asian exports and inbound foreign direct investment could be hurt. But many Asian countries have healthy government finances and they are likely to be able to mitigate an economic slowdown through further stimulus programs in the short term.

"Although we don't see any immediate impact on Asia sovereign ratings from the unfolding events in Europe, we are monitoring the potential medium-term effects of prolonged investor risk-aversion, slower global economic growth, and the possible negative impact on the European banking sector," Okorotchenko said.