However, the drive from domestic debt markets for credit ratings will remain sluggish, it says.

Asian investors and issuers are already active participants in three cross-border sectors which have phenomenal growth potential: international, Dragon and Asian dollar.

Asian investors have built up a strong presence in the Euromarkets and the United States market.

''According to one report, some 30 per cent of many Euromarket issues are eventually sold to investors in East Asia,'' the Moody's report says.

To assess the credit risk of an issuer half the globe away, Asian investors have learned to use international ratings, but primarily as a ''yes-no'' tool.

They limit their exposure to Aaa or Aa issuers only.

Moody's is optimistic that in a few years, Asian investors will be able to use credit ratings for assessing credit risk-adjusted returns.

Assessing credit risk-adjusted returns is a ''means for managing rather than avoiding credit loss'', Moody's says.

''It is an indicator of the added return that investors should demand as compensation for the added risk of default at lower rating categories.'' On the issuer side, Asian institutions have already stepped up moves in the international market to diversity their funding sources.

''We calculated recently that East Asian issuers had some US$30 billion of international or Eurobond securities outstanding at the beginning of the year,'' the report says.

''That included so-called 'clipper bonds' which are listed in both Asia and Europe.'' Another $6 billion outstanding was in Japan's Samurai market and about the same in the Yankee bond 144A US private placement markets.

The demand for capital is likely to rise further to fund development in Asia.

The need to have a rating from a well-recognised agency ''is a prerequisite for selling large issues at attractive terms and timing'', Moody's says.

The Dragon bond market, where the initial sales work begins in Asia, shares the same pool of Asian investors as in the Euromarket. Therefore, ratings are as important.

The Asian dollar bond market is considered an offshoot of the bank syndicated loan market.

It is the Asian issuers who are selling to Asian investors, mainly in Hong Kong and Singapore, who feel comfortable with the credit risk.

While some players in this market are not eager to have ratings, Moody's believes that ''ratings will take on value as more unfamiliar names attempt to issue debt in larger volumes''.

It is convinced that the regional cross-border market is ready to take off because all the ingredients are there - growing demand for capital, a growing investor base, and host of investment bankers eager to bring the two together through vehicles in a fixed-income market.

However, the development of domestic capital markets is still overshadowed by the well-developed equity markets.

By talking to market participants, Moody's concludes that demand for ratings in the domestic markets is relatively low.

Apart from feeling that they know the issuers well enough, local investors often have the misconception that the system, including regulatory authorities or banks, will provide support in times of trouble.

In addition, large portions of the bonds issued are either guaranteed by banks or are convertible into equity.

Investors then feel credit risk is irrelevant.

Thin secondary market trading means less need for rating change information, ''which is one of a rating agency's major services to investors in developed markets'', Moody's says.

Also, because there has been no default on bonds in the Asian domestic markets, credit is less of an issue.

Moody's comments: ''As in the US and Eurobond markets, the reality in Asia is likely to be that a real demand for ratings will not fully develop until investors have experienced actual credit loss on debt securities.''