This week's G8 summit 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 US and Russia met in Potsdam, Germany, 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 Wednesday to Friday.
Berlin acknowledged as much last 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 organizers of G7 and G8 summits).
"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 destabilize the entire global financial system.
Hedge funds are highly speculative and aggressive investment instruments that are estimated to manage close to US$1.5 trillion in assets worldwide.
An estimated 9,000 such funds are currently in operation, most of them based in the US and Britain.
Germany 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 US 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 US 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.
But critics slam any idea that the industry should be left to police itself. And Berlin seems unwilling to let the matter drop completely.
German Chancellor Angela Merkel recently reiterated her call for increased transparency in the sector.
"On the one hand, hedge funds increase the efficiency of the financial markets, but there's not enough transparency," Merkel said.
Such transparency was "urgently necessary" to boost "confidence in the economy," she said. "Debate about transparency for hedge funds is indispensable."
Merkel recognized that the process "requires patience. We want to continue the discussion beyond" the Heiligendamm summit.
More recently, German Deputy Finance Minister Thomas Mirow said boosting "sound practice" in the sector was not sufficient since it would not provide enough information to asses the hedge funds' financial situation and risks.
In Potsdam, German Finance Minister Peer Steinbrueck tried to paper over any differences with his G8 colleagues, insisting that the divergences were only skin deep.
It was of secondary importance "whether we will come to a specific code of conduct by end of this year or in 2008 ... so long as we get there," Steinbrueck said.
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