Soros warns of Asian `wildfire' as markets rally

Asia's battered financial markets started their slow journey along the road to recovery yesterday as hopes grew that the International Monetary Fund (IMF) would not suspend its pounds 43bn aid package to Indonesia. The only fly in the ointment was a grim warning by George Soros, the financier, that the crisis could spread outside Asia.

George Soros, the billionaire investor who last year criticised the way South-east Asian governments ran their economies, yesterday warned that the region's financial crisis was "a wildfire that has not yet been tamed".

"Developments in Asia have the power to destroy the system of world trade," he said, adding that a spill-over of the crisis to China and Latin America could not be ruled out.

Mr Soros, in an interview with a German newspaper, said the crisis showed there was a need for tighter regulation of the provision of credit.

His warning did little to dampen sentiments in the region as shares and currencies rallied for a second day on optimism that the financial crisis might be bottoming out. Indonesian markets led the gains, with the stock index surging as much as 9 per cent and the currency strengthening 16 per cent.

Meetings between President Suharto, a US presidential envoy and IMF officials allayed concern that the IMF might suspend more than $43bn of aid to encourage the government to cut spending and deregulate the economy.

Michel Camdessus, the IMF's managing director, said it would seek a "dramatic acceleration" of reforms in Indonesia, raising hopes for a more stringent timetable to restore confidence in the economy. He is drafting a new letter of intent on reform to be signed in Jakarta, after increased spending in Indonesia's budget last week sparked concerns that the country was not serious about reform.

Markets that slumped on Monday extended their rally after gains in US stocks on Tuesday night. Tokyo's benchmark Nikkei 225 index rallied 2 per cent, Hong Kong's benchmark stock index rose 5 per cent, Singapore's jumped more than 7 per cent and Malaysia's gained almost 8 per cent.

Meanwhile, a confidential study by the IMF acknowledged that an important element of its rescue strategy for Indonesia backfired, causing a bank panic that helped set off financial market declines in much of Asia, according to a report in the New York Times. Instead of inspiring confidence as hoped, bank closures helped bring Indonesia's banking system to the brink of collapse.