Bangkok - In case anyone had any doubts, the largest bankruptcy in US history plus a bailout of the largest US insurer have demonstrated that Asia is still very much coupled to the world's largest economy.

Asian stock markets suffered sharp declines across the board Monday and Tuesday on the weekend double whammy from across the Pacific, with Lehman Brothers filing for bankruptcy while Merrill Lynch was taken over by Bank of America.

That was swiftly followed by more bad news that the American Insurance Group (AIG), the world's largest insurer, was seeking a bailout, which it received Tuesday to the tune of 85 billion dollars, much to the relief of AIG policyholders in Asia, including 5.8 million in Thailand and 1 million in Hong Kong.

Asian central bankers tried to calm the waters with claims that the impact of the Lehman crisis will be limited on local financial institutions. But several central banks have dropped their interest rates just in case.

The looming question for Asia is whether the downfall of these US financial giants marks the beginning, mid-point or end of the ongoing US crisis.

"We are not certain the US economy has reached bottom," said Chao Kengchon, chief economist at KSC Research, a Thai think tank. "The property market is still problematic so securities linked with properties are going to have their values slashed with an impact on other financial institutions."

Financial problems in the US market spells illiquidity in Asia.

"Everyone will feel the pinch because when the US market needs liquidity they must sell their assets in Asia and elsewhere," said Chao. "The money flows from Asia back to the USA."

Although most Asian economies are still expecting healthy growth this year, the prognosis for the future is getting worse with each US collapse.

"If this is prolonged, businesses will be affected, exporters will suffer," said Astro Del Castillo, managing director of First Grade Holdings Inc in Manila. "Consumption will slow down in the US and if that happens, then Philippine exports will also slow down not only to the US but also to Japan and China as well."

The greatest exposures to Lehman are in banks in Japan, but then Japanese banks are larger than most. More worrisome for stock analysts than bank exposure, is the likely impact on the yen, which will strengthen against the dollar and further affect Japan's already slowing exports to the US.

"If the triple evils of stronger yen, declining stock values and high oil prices come all at the same time, the Japanese economy that has already entered a recession would be pushed down even further," said Takahide Kiuchi, chief economist of Nomura Securities.         Taiwanese banks were also named in Lehman's bankruptcy filing as significant unsecured lenders.

According to Financial Supervisory Commission, Taiwan's total exposure to the Lehman Brothers group of companies is about 2.5 billion dollars.

The island's central bank has decided to cut its bank reserve ratios from Thursday to free up 6.25 billion dollars in a bid to ease fund flows and boost the local markets.

Joseph Yam, head of the Hong Kong Monetary Authority, admitted that the crisis in the US would have an "adverse impact and contagious effect" on the Hong Kong stock market, but stressed that the local financial industries were sound and well-regulated.

  Two top Philippine banks set aside 94.7 million dollars in provisional funds to cover possible losses arising from Lehman Brothers' collapse and the central bank has also offered emergency lending to banks that might need funds.

"We have to trust our banking system," said Philippines central bank Deputy Vice Governor Diwa Gunigundo. "Non-performing loans are down, capitalization is higher than the statutory requirement, and banks with exposure are taking steps to protect their depositors."

   Indonesia's central bank took another step to ease panic-selling in equity and rupiah-denominated assets by cutting its overnight lending rate from 12.25 per cent to 10.25 per cent to help pump liquidity into the market.

Ironically, 2008 was kicked off with much talk of the "decoupling" of Asian economies - which had recovered from the 1997 financial crisis with flying colours - from the US economy.

"We have always felt that the 'decoupling' idea was misleading since the reality must be that Asia is influenced by growth in the rest of the world," said David Marshall, Managing Director Head of Financial Institutions Asia-Pacific at Fitch Ratings.

Nevertheless, Asia is still doing better than the battered US, and in good position to keep growing.

"Emerging Asia can continue to grow at a pace that is not only much faster than the mature economies of the developed world but may remain strong in absolute terms," predicted Marshall. dpa