Germany repulsed on G8 hedge fund push

BERLIN (Reuters) - Germany appears to have failed in its attempt to get Group of Eight (G8) finance ministers to press for a voluntary code of conduct for hedge funds when they meet outside Berlin later this week.

A senior German finance ministry official said on Tuesday that he did not expect the G8 to mention such a code in their final communique, to be presented in Potsdam on Saturday.

An earlier draft of that communique seen by Reuters mentions the code of conduct, suggesting that Germany has failed to persuade sceptical countries such as Britain and the United States to keep such wording in the statement.

"Even if this term (code of conduct) will not be used in Potsdam, don't think that Germany has given up on this issue," the German official told reporters, requesting anonymity.

He left open the possibility that the code could be mentioned at a summit of G8 leaders in the Baltic resort of Heiligendamm next month.

Germany has been pushing for increased transparency on the activities of hedge funds and Finance Minister Peer Steinbrueck told Reuters last week he wanted the outlines of a code of conduct by the end of this year.

The failure to mention the code in Potsdam represents a setback for his efforts to agree stepped-up measures for self-regulation of the $1.6 trillion industry.

Germany fears hedge funds could threaten the stability of the financial system through their heavy reliance on borrowing to finance risky trading strategies.

They point to the example of the U.S. fund Long Term Capital Management LTCM.L, which came close to collapse in 1998 amid a crisis in emerging markets which dried up liquidity. The U.S. Federal Reserve was forced to intervene at the time to prevent the LTCM crisis from threatening the broader financial system.

Washington and London have responded frostily in debates on the issue so far, and Japan appears to have sided with them. Germany has not found vocal support from other G8 countries such as Italy and France either.

Germany holds the rotating presidency of the G8, which also includes the United States, Canada, Japan, Britain, France, Italy and Russia.

WOLFOWITZ EXPECTED

The German finance ministry official said the meeting in Potsdam, which is designed to lay the groundwork for a June 6-8 Heiligendamm meeting, would not touch on exchange rates.

U.S. Treasury Secretary Henry Paulson has announced he is skipping the Potsdam meeting because of a heavy workload -- an unusual move some have linked to Steinbrueck's decision to miss a G8 gathering in Washington last month in favour of a family holiday in Namibia.

German officials said they were also unsure who the French would be sending to the meeting as incoming French President Nicolas Sarkozy is not expected to name his ministers until later this week.

One official the Germans expect to attend is World Bank President Paul Wolfowitz, who is under intense pressure to resign over his handling of a promotion and pay raise for his Bank-employee companion.

Wolfowitz, who was an architect of the U.S.-led Iraq war during a previous stint at the Pentagon, rejected on Monday a report from a World Bank committee which found that he violated ethics rules in the affair.

"The situation as of noon today is that he is coming," the finance ministry official said.