Asian markets recovered some poise yesterday, helped by Wall Street's bounce-back and hopes that International Monetary Fund-backed reforms would be firmly embraced as the only sure way out of the financial turmoil. Indonesia led the way, with share prices closing 8.5 per cent up as the government moved close to an agreement with the IMF, which yesterday eased the terms of its tough austerity programme.
The IMF's deputy managing director, Stanley Fischer, said President Suharto of Indonesia had agreed to "strengthen" the terms of the IMF package, without giving details. In return, the IMF will no longer require Indonesia to have a budget surplus, sparking expectations the IMF may be more receptive to changes in the conditions it imposed earlier.
Lawrence Summers, the US Deputy Treasury Secretary, said after his meeting with President Suharto: "It's clear that President Suharto recognises the need to take strong steps of the kind that have been under discussion with the IMF to create confidence and to build on the very strong foundations for prosperity that Indonesia enjoys."
The comments came as the IMF rescue package faced a fresh threat from an unholy alliance of left and right-wing politicians in the US hostile to America funding a bail-out programme. The Federal Reserve chairman, Alan Greenspan, was heckled for defending US aid to Asia by activists at a meeting at a Los Angeles community centre.
Yesterday also brought a mea culpa from Fitch IBCA, one of the main credit ratings agencies, which admitted it had underestimated the seriousness of South Korea's problems until it was too late. The agency's report said: "The lessons for rating agencies - and indeed for international financial institutions such as the IMF - are profound because Asia-Pacific represents a new form of sovereign crisis."
The oversight had been to ignore the fact that a high proportion of South Korea's debt was very short term because its total level of indebtedness was low - lower, for example, than Canada, Sweden or Australia. However, the structure of the debt turned out to matter because of the weakness of the Korean banking system when confidence in its solvency crumbled.
Fitch IBCA also criticised the Korean authorities, saying they seemed to have been in "psychological denial" about the crisis and failed to take suitable actions.
In Hong Kong, shares were also up almost 7.5 per cent as interbank rates eased and the market showed it was ready to discount the collapse of Peregrine Group, Asia's largest home-grown financial conglomerate, which was placed in the hands of liquidators Price Waterhouse yesterday.
There were emotional scenes in Hong Kong when the founders of Peregrine described how the Indonesian crisis had brought it down. "What happened was a complete meltdown in a country," Peregrine's chairman and co-founder Philip Tose said, his voice quivering.
Peregrine's managing director Francis Leung, tears streaming, said he hoped to keep helping China-related firms raise capital. Speaking in public for the first time since the collapse, Mr Tose confirmed the group's problems centred on Indonesia, where it was hit by a bad short-term loan totalling $265m (pounds 164m) to a transportation company.
Meanwhile, the Hong Kong market was buzzing with rumours that Mr Leung was talking to a number of mainland Chinese companies about taking over the still-profitable stockbroking parts of the group's business. Mr Leung refused to comment. Price Waterhouse said there was significant interest in buying parts of the Peregrine business.
While Hong Kong shares were staging a recovery, a note of caution was issued by Moody's, the credit rating agency. It said that it had put a watch on the ratings of the territory's biggest bank, Hongkong Bank, and its sister bank, the Hang Seng Bank, as well as Bank of America.