U.S., Europe Debt Woes Worry Asia

Funds would suffer as well; those mandated to hold only AAA-rated bonds would be forced to sell if a default occurred, throwing yet more turbulence into an already shocked market. Banks might have to halt lending or sell some of their riskier assets to increase their reserves. And spooked investors might dump emerging market stocks out of fear of further losses.

Foreign exchange markets could be hit really hard, thanks to foreign margin rules that allow as much as $100 to be bet for every $1 the trader actually possesses. If the U.S. goes down, Treasuries used for collateral or to fund that margin would cause chaos.

Despite the potential for severe consequences, Asian nations appear not to have contingency plans. Faith in a positive outcome is one reason, despite the fact that others are not so sanguine. Chris Krueger, research analyst at MF Global in Washington, said in the report that as of Friday he gave the U.S. a 40% chance of failure to raise the debt limit by August 2.

If the unthinkable happens, Asian countries may have to lower their investing standards. A senior official at the Reserve Bank of India said that the country did not invest below AAA-rated Treasuries, but might have to change its strategy should the U.S. be downgraded—something threatened by Standard & Poor's if the U.S. fails to cut the long-term deficit. "We can only wait and watch," the official said. "Alternate options like the euro are equally bad, and [British] pound sterling hardly has the depth to absorb this kind of investment."