Asia seems largely unhurt by the financial crisis gripping the United States and some European states. In fact, there has been no direct impact on the economies of most of the developing and poor states for these are basically domestic demand-driven and hardly exposed to what happens in the advanced financial world.

Nor have India and Pakistan been directly affected as such in the immediate context.

Indian government says its economy will remain unaffected unless there is a mess up in the domestic market. However, it cannot be completely insulated from the US financial crisis, given the sort of its integration with the global economy as an emerging economic power. This is despite the fact that domestic factors play more a important role in determining its performance.

East Asian banks have also escaped the effects of the Wall Street crisis. Despite reports to the contrary, most of the banks are in good shape for lack of exposure to the woes of Fannie Mae, Freddie Mac, and Lehman Brothers. There was run on one bank only – Hong Kong’s Bank of East Asia – but it lasted only 24 hours after rumours died down and the bank issued a clarification. Singapore’s banks also look well positioned to weather the storm, if any. Even Thailand, whose banks were among the worst hit in the region a decade ago, is looking attractive. Indian banks, too, are well insulated from the troubles rolling other financial institutions.

However, economic growth in Asia is likely to suffer to the extent the region is still strongly dependent on exports for its good health, and this may impact the banks.

The international community will surely feel the effects of the continuing US recession and a slowdown in Europe but several regions are well prepared to withstand the adverse global conditions. Much of the fastest growth continues to be in the developing Asian economies, especially China and India. This is despite the fact that weak conditions in the United States, coupled with higher commodity prices, have already started affecting the economies of the developing countries in a varying degree.

Countries that are net exporters of commodities are likely to withstand the pain, according to BusinessWeek which also notes that, in fact, China is capable of thwarting the global recession whenever it occurs.

The world growth is now facing a slow-down in response to the recession in the US and higher energy prices. Challenges the world economies are facing in 2008 are expected to continue into 2009. Although the US does not dominate the world economy as it once did, its economy’s deteriorating state can still shake up the international financial system. While the global economy would, of course, not be falling in response to the US stumble, it cannot escape a slowdown to regain its balance, according to an analysis by Standard & Poor.

The current US slowdown is believed to be less critical than it would have been 10 years ago, thanks to Asia’s rise and an improving picture in emerging economies. This has reduced other countries’ dependence on the US simply because it is no more the leader of global growth. So, even if the US slips into recession (as it has already done), industrialised and emerging countries will keep growing in 2008, though the growth may not be much high. But it cannot be denied that a protracted slowdown in the US, along with possible extension of present turmoil, will affect most of the world.

The American GDP is expected to drop at the end of 2008 and slightly recover in mid-2009 but the growth rate is unlikely to improve, decelerating to just 0.8 in 2009 from 1.8 per cent this year. The odds of an actual recession, as such, have risen to 80 per cent.

Since foreign investors have lost confidence in American securities and the US dollar, investment would slow down in the months ahead. According to analysts, investor fears abroad about American credit risk and the threat of a declining dollar has increased dramatically. The result could be a major drop in the value of dollar and a big rise in US interest rates, thus extending the recession but foreign central banks would not allow this.

They intervened to slow the dollar’s fall in 2007, not to help the US financial markets but to protect their own countries’ trade surpluses, which depend on bilateral surpluses with the US. Then, it is because of the US sub-prime mortgage problems and related instabilities in the international capital and financial markets that central banks have taken dramatic action to stabilise global markets and the US has moved to a more complete, though expensive, solution.

Now the question arises: Could the dollar get hammered by the $700 billion bailouts which are about to be implemented? In fact, the connection between the dollar and the size of the US government debt has always evoked ugly fears in international finance. The US depends on foreign investors to finance its budget shortfalls and at present 47 per cent of treasury bonds are held in foreign capitals. Once the confidence in the dollar is shattered completely, foreign investors would demand higher interest rates or would, as a better option, go for bonds denominated in yen, euros or yuan. If the dumping of the dollar occurs on a large scale, it would come crashing down.

As of today, the dollar has declined but not crashed but the patience of foreign investors has started to wear thin. Foreign central banks already showed their concern by urging Washington to take over Fannie Mae and Freddie Mac. Now if foreign holders of US equities and bonds do not like the way the bailout goes through, there could cause a run on the dollar. Investors and policy makers, according to Bsinessweek, got a rude taste of that possibility on September 22 when the dollar plunged 2.5 per cent against the euro as investors realised the bailout would not bring a quick recovery. That was the biggest one-day drop since 2001.

So far, the foreign central banks and sovereign wealth funds have been steady in their purchases of US debt and equities during the current year. But private investors have cut down net holdings of Fannie Mae, Freddie Mac, and other agency debt by $37 billion. They also cut net purchases of US corporate bonds to $70 billion from the $660 billion bought the previous four quarters.