There are growing fears that Hong Kong's government will be forced to devalue its currency unless it can drastically rein in spending.

The Hong Kong dollar has been fixed in value against the US dollar for almost 20 years, and a devaluation would have serious consequences for the whole of Asia.

Credit rating agency Standard and Poors - which keeps track of debt levels of governments and companies - says Hong Kong's budget deficit is likely to be about $8bn this year, far higher than official predictions.

The agency has cut from stable to negative its long term outlook on the Hong Kong dollar.

Calming waters

Financial Secretary Antony Leung confirmed the economic difficulties at a question and answer session with lawmakers on Friday.

"If we do not eradicate the problem of deficits, it will affect the stability of the economy and the financial system," Mr Leung said.

Senior officials were trying to calm fears about a possible devaluation.

"I don't think we are under any serious threat at all about monetary stability," said Joseph Yam, chief executive of the Hong Kong Monetary Authority.

But analysts were warning that the government - faced with shrinking reserves - may not have any alternative.

Recession blues

Anthony Teoh, director of research at South China Brokerage, told the BBC's World Business Report that the government will be forced to break the dollar peg if reserves keep declining.

And many analysts believe that would result in a 20% devaluation.

Before 1997 a considerable amount of the Hong Kong government's reserves came from land sales and taxes.

But, in the current economic climate, property prices have fallen dramatically and there is less revenue from taxes due to the recession.

Hong Kong has never fully recovered from the Asian financial crisis.

It recorded nearly flat economic growth last year, and is forecast to record 1.5% growth this year.