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4TH LD: G-8 upbeat on economy, agree to strengthen monitoring hedge funds.

POTSDAM, Germany, May 19 Kyodo


Group of Eight finance ministers reaffirmed Saturday that the global economy is solid amid receding inflation risks and agreed to strengthen monitoring of hedge funds, although they failed to agree on any steps to tighten regulations on them.

''Global growth remains robust and it is more balanced across regions and within our countries,'' the G-8 finance ministers said in a statement released after their two-day meeting at a lake resort near the eastern German city of Potsdam.

The finance ministers from Britain, Canada, France, Germany, Italy, Japan, Russia and the United States said that risks for the world economy ''have abated.''

At the same time, the G-8 statement noted, ''High and volatile energy prices remain a concern and we will remain vigilant.''

As most market players expected, the statement did not mention the exchange rate issue because central bank governors did not take part in the gathering.

The G-8 financial leaders also renewed their resolve to pursue sound policies to foster sustained and balanced growth and support the orderly adjustment of global imbalances.

The talks were held in preparation for the G-8 leaders' summit on June 6-8 in Heiligendamm, Germany.

On hedge funds -- the issue given top priority under the chairmanship of German Finance Minister Peer Steinbrueck -- the G-8 only reached an agreement on the need to keep an eye on their activities through monitoring financial institutions that provide them with funds.

While acknowledging that hedge funds ''have contributed significantly to the efficiency of the financial system,'' the G-8 ministers said that they ''need to be vigilant'' given the strong growth of the hedge fund industry.

The G-8 also called for hedge funds to improve their risk management and disclosure to investors and financial institutions that provide them with funds, while urging investors and financial institutions to try to obtain accurate and timely portfolio valuation and risk information about hedge funds.

The G-8 finance ministers reached the conclusion based on a report submitted to them by the Financial Stability Forum, an expert panel headed by Bank of Italy Governor Mario Draghi.

Although the wording of the statement reflects both positive and negative sides of hedge fund activities in the global market, it is seen as a setback for Germany which had wanted to enhance control of hedge fund activity.

In a concession to other G-8 members, Steinbrueck said Friday that Germany is not calling for tightening regulations by authorities but is now seeking a ''code of conduct'' for the hedge fund industry.

But even the idea of a voluntary code of conduct apparently failed to win support from most of the G-8 finance ministers, including the United States, Britain and Japan, as the statement did not mention it.

Steinbrueck told reporters after the Potsdam gathering that differences among G-8 nations' approach to hedge funds are not as big as they may appear, because nobody wants potential systemic risks to develop, Dow Jones Newswires reported.

The United States and Britain do not want a code of conduct imposed upon hedge funds, but they would accept a code developed by hedge funds themselves, Steinbrueck was quoted as saying.

Japanese Finance Minister Koji Omi told a news conference after the meeting, ''We agreed that making hedge funds to create a code of conduct now will enhance control on them in an inappropriate manner, and we expect them to have non-binding best practices.''

Omi also revealed that the Group of Seven finance ministers will hold talks in October in Washington with representatives from financial institutions that finance hedge funds.

Omi proposed the idea during the meeting and other G-8 finance ministers supported it, he said.

The G-7 nations are the G-8 minus Russia. Deputies of G-7 finance ministers held talks with representatives of hedge funds at the April G-7 meeting.

The G-8 meeting was convened at a time when the balance of assets held by hedge funds has swollen to about $1.5 trillion -- roughly a third of Japan's gross domestic product. It is feared that a huge unilateral hedge fund transaction could trigger volatile market moves and harm otherwise solid global economic growth.

On other issues, the G-8 also called for efforts to break a stalemate in the Doha Round of global trade liberalization negotiations under the World Trade Organization.

''It is necessary to achieve an ambitious balanced and comprehensive deal that delivers economic benefits for all members,'' the statement said.

As part of their efforts to ensure energy security and address climate changes, the G-8 ministers said they consider energy efficiency and the promotion of energy diversification, including nuclear energy, to be important.

The G-8 meeting was also kept low-key due to the absence of two ministers -- U.S. Treasury Secretary Henry Paulson and Jean-Louis Borloo, new French minister for the economy, finance and employment.

Their meeting began Friday evening with a working dinner attended by representatives from five African nations -- South Africa, Nigeria, Ghana, Mozambique and Cameroon.

The G-8 ministers adopted the ''G-8 Action Plan for Good Financial Governance in Africa'' to boost transparency in aid for Africa and support African nations' efforts to fight corruption and improve transparency in the use of revenues stemming from extractive industries.

The action plan also urges donor nations to improve the transparency of their aid in accordance with internationally shared principles.

The G-8 ministers also agreed on the ''G-8 Action Plan for Developing Local Bond Markets in Emerging Market Economies and Developing Countries'' aimed at fostering growth and financial stability.

The G-8 ministers renewed their pledge to fight money laundering, terrorist financing and other illicit financing involving similar risks to the stability and integrity of financial markets.
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Publication:Japan Policy & Politics
Date:May 21, 2007
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