10 February 2007

FT: Berlin scales back hedge funds ambitions

The outline deal would mark a scaling-back of Germany's original ambitions for regulating the industry. But Peer Steinbrück, the German finance minister, indicated yesterday that it stood a good chance of winning the backing of the US and UK.

Mr Steinbrück will use a meeting of the Group of Seven industrial nations in Essen, Germany, to stress the economic benefits of hedge funds - but also the risks to financial stability. He will seek agreement on proposals including commissioning a joint report into the trillion-dollar sector and starting direct talks with hedge fund managers.

'Of course in the Anglo-Saxon world the readiness to address this issue is always balanced by the need not to damage the industry. That is why a confrontational ap-proach wouldn't work,' Mr Steinbrück said. 'When we talk about hedge funds we don't call into question their benefits. But we also want to look at the systemic risks.'

Germany will ask for an update of a 2000 report by the Financial Stability Forum, an international organisation bringing to-gether the financial industry, regulators and central bankers. Mr Steinbrück said deputy G7 finance ministers would also be instructed to discuss with fund managers how transparency in the hedge fund sector could be improved.

In a clear attempt to address US and UK concerns about any binding regulation, Mr Steinbrück said he favoured a voluntary ap-proach to boosting transparency, echoing the position taken by Jean-Claude Trichet, president of the European Central Bank. 'I personally think it would be better if this information were provided voluntarily,' he said. Germany holds the presidency of both the G7 and the European Union.

Mr Steinbrück admitted to having had to convince his own Social Democratic party of the role hedge funds played in providing funds for business. 'They lead to higher efficiency and to companies correcting weaknesses,' he said.

Mr Steinbrück avoided any comment on exchange rates, though he confirmed the topic would be discussed. Financial markets will be looking closely for any reference in the final communiqué to the weakening yen or possible threats to financial stability posed by 'carry trades' - the flow of funds from countries with low interest rates, such as Japan, into higher yielding assets.

But he said he was 'more optimistic' than a few months ago about the prospects of reviving the stalled Doha round of world trade talks. The issue was last night high on the agenda of a dinner at Essen's Villa Hügel.

Attending were Mr Steinbrück's G7 counterparts and finance ministers from China, Russia, India, Brazil, South Africa and Mexico. Mr Steinbrück predicted the G7 group would expand to include fast-growing economies such as China, India and possibly others.

His comments were at odds with views expressed by Chancellor Angela Merkel.

© Financial Times