France's Lagarde blocks deal on EU hedge fund rules

Date: Friday, October 1, 2010
Author: John O'Donnell and Daniel Flynn, Reuters

* Lagarde gets German support to deliver blow to talks

* Move puts Paris and Berlin on course for clash with U.S.

* Row centres on allowing foreign funds into European Union

France's economic chief Christine Lagarde dashed hopes of a deal on hedge fund rules at a European ministers' meeting, saying she opposed part of the law that would make it easy for foreign funds to work in the EU.

Diplomats and one senior official said Lagarde's "bomb shell" came with Germany's blessing and put two of Europe's biggest countries on track for a clash with Washington.

France believes issuing a pan-EU licence to foreign funds would be a mistake because controls on those entering the market are unlikely to be tight.

But U.S. Treasury Secretary Timothy Geithner has been angered by what he sees as attempts to build a barrier to foreign funds and Washington has already voiced its concerns at previous meetings of the top global powers in the G20.

"We all have to deliver appropriate supervision of hedge funds but it doesn't mean opening up the territory to unsupervised funds," Lagarde said on Thursday, explaining her opposition to giving foreign funds an EU licence.

"What we seek is appropriate supervision, a good European passport for European funds and for the rest clearly appropriate supervision. Europe is not a jungle."

France's refusal to back a scheme to give foreign funds a licence or passport to do business across all of the EU's 27 states scuppers any chances of a deal between ministers on a new regime for the hedge fund and private equity industry.

Diplomats said the "total deadlock" that results could lead to a lengthy delay for one of the most high-profile reforms in Europe and would be a set back to Brussels' attempts to catch up with Washington, which recently voted through a regulatory overhaul of banking and trading.

Some had hoped the ministers' gathering could have ended a long-running feud over a new regime for a secretive industry to put them under the ultimate control of a new European watchdog and subjecting them to closer inspection by regulators.

"We have reached a surreal state of affairs where those who called for the directive in the first place are now the ones holding it up," said Andrew Baker, head of industry group, the Alternative Investment Management Association.

POLITICAL TANGLE

Despite being overshadowed by an ongoing economic crisis, the issue has been seized on by Nicolas Sarkozy, pitting the French President against British leaders and Washington, who labelled refusal to give licenses to foreign funds as protectionist.

On Wednesday, Michel Barnier, the French commissioner in charge of European Union financial reform, said he would continue to push for a compromise and demand an EU-wide licence for foreign funds.

Barnier is influential as he will broker a deal on this law between countries and the European parliament.

"France's position is nothing new. What matters it that we find a compromise quickly," said Barnier. "A passport will need to be part of that final compromise."

Britain, which is home to most European hedge funds, also wants to give foreign funds wider access to Europe.

Its financial services minister Mark Hoban made a veiled reference to Britain's concerns, saying that enhancing competition and upholding principles of non-discrimination had been critical in driving economic growth across the EU.

Barnier will struggle to untangle what has become an intensely political row. Diplomats said Germany had offered its support on the understanding Paris would side with it in negotiations about controlling country spending in the EU.

Berlin wants to introduce tough sanctions to punish countries like Greece who snub EU rules on spending while France has so far pushed for softer penalties.