The upcoming Group of Eight summit in Heiligendamm looks set to bring a humiliating blow for host country, Germany, which is fighting an increasingly lonely battle for regulation of the trillion-dollar hedge fund industry.
No common line was found on the issue when the finance ministers of Britain, Canada, France, Germany, Italy, Japan, the United States and Russia met in Potsdam two weeks ago. And it looks equally unlikely that consensus will be reached when the bosses of those finance ministers gather in the plush Baltic coast resort of Heiligendamm from June 6-8.
Berlin acknowledged as much this week. "We won't score our big hit (on hedge funds) in Heiligendamm," the German G8 "sherpa," Bernd Pfaffenbach, said in a newspaper interview. Sherpas are the organisers of G7 and G8 summits, taking their name from the Himalayan mountain guides who accompany climbers to the world's highest peaks.
"We talked about (hedge funds) at the summit in Gleneagles in 2005, but ran up against a wall there," Pfaffenbach told the daily Sueddeutsche Zeitung in its Friday edition.
"This time the US and Britain, where most of the funds are based, are prepared to discuss the issue. That's a start," he said. Germany has put the issue on top of the agenda of its year-long G8 presidency because it is concerned that rapid growth in the increasingly powerful sector could destabilise the entire global financial system.
Hedge funds are highly speculative and aggressive investment instruments that are estimated to manage close to 1.5 trillion dollars in assets world-wide. An estimated 9,000 such funds are currently in operation, most of them based in the US and Britain.
Berlin fears a possible domino effect should one of the big funds fail. But it has been gradually forced to scale back its ambitions for increased transparency and more disclosure in the sector in the face of fierce resistance, particularly from Britain, the United States and Japan.
At the G8 finance meeting in Potsdam, Germany already watered down its original demands and settled for calling for a "code of conduct." But even there, it again came away empty-handed.
A specially commissioned report compiled for the G8 by the so-called Financial Stability Forum took the same line as the United States and Britain, finding that it was up to the industry itself to "review and enhance existing sound practice benchmarks." Not surprisingly, the hedge fund sector itself has rebuffed the German initiative, arguing that the environment in which they operate is already heavily regulated. It therefore questions the value of a voluntary code of conduct.
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