Central banks from US, Japan, Switzerland, England on Thursday joined forces with European Central bank, promising to provide enough US dollars to European banks, in three separate three-month loan.

For now, investors welcome the action as a short-term fix but the risks remain that capital may be pulled from Asia as Europe's longer-term problems remained unresolved.

The move rallied markets across Asia, even though it's only a stop-gap measure.

But, markets are generally short term and should the crisis in Europe deepen, Asia could be affected if liquidity-starved European banks start to pull capital out.

The Bank of Korea this week highlighted the liquidity crunch in Europe as a potential risk.

Westpac Bank's associate director, Jonathan Cavenagh, said: "If we see the situation deteriorate further in Europe and we see the financial sector or the banking system in Europe start to not function properly, we could certainly see European banks pulling assets, pulling funds invested, out of the region.

European banks are facing a dollar shortage as the Federal Reserve's bond-buying programme comes to an end.

And as the quality of the peripheral government debt on their balance sheets deteriorates, it makes it harder for them to borrow money.

The premium European banks pay to borrow in dollars through the swaps market is around the highest level in three years.

Economics Nobel Prize laureate, Michael Spence, said current funding pressures are manageable.

Mr Spence said: The ECB, with support from the other major central banks, is intervening to recapitalise these banks. And if they succeed in recapitalising them enough, then the failures in the credit system - the freezing up effect in the payment system - should go away.

If the central banks succeed in solving this short term liquidity crunch, it could buy them more time and political capital as EU ministers and US Treasury Secretary Timothy Geithner met on Friday to discuss the euro zone's bailout fund.

channelnewsasia.com