EU PLANS to impose tougher regulations on private-equity and hedge funds, which have met with resistance in Dublin, ran into trouble yesterday when Britain vowed to block measures it said would damage the City of London.
The deadlock came after Monday’s decision by euro zone finance ministers to settle on bilateral loans for Greece as their favoured mode of intervention if special aid is required.
This development was swiftly followed by positive news for Greece when credit rating agency Standard and Poor’s (SP) said that it was no longer planning an imminent downgrade of its debt, sending its bonds higher.
The gains curtailed the premium over comparable German debt that investors demand to hold Greek debt. As SP affirmed Greece’s BBB+ rating, the yield on two-year Greek bonds fell by 24 basis points to 4.61 per cent.
EU moves to tighten the regulation of funds foundered when British prime minister Gordon Brown intervened to avert the threat of defeat in an EU vote, leading Spain’s rotating presidency of the union to withdraw the proposals from a meeting of finance ministers.
Spanish minister Elena Salgado, who chaired the meeting, said that she still hoped to strike a deal before its six-month presidency ends in June.
“We want to convince everyone and we believe we can convince everyone,” Ms Salgado told reporters.
The development was greeted with a certain amount of relief in Dublin, where officials say the manoeuvre provides new scope to negotiate concessions over parts of the new regime that the Government sees as a threat to Ireland’s important funds industry.
Minister for Finance Brian Lenihan has taken issue with two aspects of the proposed Alternative Investment Fund Manager directive, an initiative that is designed to foster transparency in an opaque sector of the financial markets while curtailing excessive debt and pay.
The issue is highly sensitive in Europe, given acute anxiety that speculators have intensified Greece’s refinancing difficulties. Although European Commission wants to ban the “naked” selling of credit default swaps – taking out insurance against the risk of sovereign default without holding the underlying asset – finance ministers did not discuss the issue at their monthly meeting yesterday.
Mr Lenihan has campaigned to change the provisions in the directive on valuation liability and depositary liability. The Government argues that these provisions have potential to dim Ireland’s lustre as a big back-office hub for fund operators.
On valuation liability, Dublin argues the draft directive could see valuers held responsible for drastic changes in the value of investment assets due to circumstances beyond the control of the fund. Such responsibility should properly rest with the fund manager, the Government believes.
On depositary liability, the Government argues that the draft imposes an undue administrative burden in respect of the responsibility to carry out checks as to the adequacy of security held over an asset.
Such issues are separate to acute concern about the directive in Britain, which has clashed with Germany and France over their claims that the financial crisis increases the need for financial regulation.
EU internal markets commissioner Michel Barnier said there remained a pressing need for such regulation. Mr Barnier, a Frenchman, said he did not take instructions from Paris, London or Washington, which had lobbied against the directive because of concern that it would discriminate against US firms. “There are potential systemic risks which are undeniable,” Mr Barnier said.
UK chancellor Alastair Darling told reporters here that the directive would damage the City, home to 80 per cent of the European hedge fund sector, because funds approved by British regulators would not have a “passport” to market investments throughout the EU. This would drive the business offshore, he argued.
