Uneasy calm descends on South-east Asia as IMF grants aid to Indonesia

After the Hong Kong market survived one of the most turbulent weeks in its history, observers are wondering whether the turmoil will leave bodies scattered around the financial community. Separately, the IMF has agreed to pump billions of dollars into Indonesia to shore up the country's battered economy and currency. Stephen Vines in Hong Kong reports.

There is talk in Hong Kong of broking houses being forced into mergers to stay afloat and of fund managers bracing themselves to report horrendous losses. However, as yet, there is no more than rumour to go on. Only one major financial institution has decided to tackle the rumours in public - Peregrine Investment Holdings, the well-connected and spectacularly fast-growing Hong Kong-based investment bank.

Early in the week it took out full-page newspaper advertisements to announce that "rumours of losses by Peregrine running into hundreds of millions of US dollars and of Peregrine's financial demise are completely false".

However, the company admitted it had been hit hard in its equities and fixed-income divisions, with profits falling by 58 per cent and 42 per cent respectively in the period from 1 January to 24 October.

Other investment houses have responded to the crisis by retreating from public view. Eventually, the extent of the damage will be clear.

One banker, working for a European company, said: "It's hard to tell how bad things are. A lot of these guys had big positions in the stock markets and were speculating like hell in currencies. It is impossible to believe that, as these markets took a dive, none of them got hurt, even if they climbed back after a bit of recovery."

Following a week of excitement, which some market-makers would dearly like to forget, yesterday proved relatively uneventful. The Hong Kong stock market rose by a modest 2.5 per cent, a figure which would be impressive elsewhere but meant little in a market which has seen double-digit percentage swings throughout the week.

The rise was largely due to testimony given yesterday in the legislature by Joseph Yam, the head of the Hong Kong Monetary Authority, who admitted that the territory's de facto central bank had been in the market buying Hong Kong dollars to defend the currency's fixed link to the US dollar.

However he stated that the authority had got back all the Hong Kong dollars it sold and actually ended up with more foreign currency in the reserves because it had also been playing hard ball in fixing overnight inter- bank interest rates at very high levels, forcing speculators who had taken short positions in the market to cover these positions at high cost, which meant buying back Hong Kong dollars.

Mr Yam declared that the government's defence of the Hong Kong dollar had been a success. Share traders took heart from this statement, which fuelled a flurry of business in the afternoon trading session.

The blue-chip Hang Seng index ended the week less than 5 per cent down while the two indices tracking China-related stocks posted comfortable gains.

This was not the case in South Korea, which is shaping up to be the next trouble spot in Asian markets. Heavy intervention by the central bank to prop up the ailing Korean won only succeeded in stabilising the currency's decline.

Meanwhile, Indonesia will receive $23bn (pounds 13.7bn) in assistance from the International Monetary Fund and other monetary organisations in exchange for its pledge to restructure its financial sector. Michel Camdessus, managing director of the IMF, said the three-year aid package was designed to shore up the rupiah.

The package will be supplemented by a back-up facility that includes $3bn from the US and additional funding from Australia, China, Hong Kong, Japan, Malaysia and Singapore.

Indonesia will reform its banking and financial industry and scrap monopolies held by the government's Bureau of Logistics on food items such as soy, wheat, garlic and flour. The government will also agree to a three-year "tight" monitoring of its economy by the IMF.