Geithner Warns EU On Hedge-Fund Law

(Reuters) – U.S. Treasury Secretary Timothy Geithner has written to French economy minister Christine Lagarde warning her against curbing foreign hedge funds in Europe as a row with Washington over new EU controls escalated.

The correspondence, sent late on Tuesday and seen by Reuters, increases pressure on Paris to make concessions on new controls for private equity and hedge funds.

Officials familiar with U.S. thinking said France’s position had antagonised Washington, which is worried that American hedge funds will be blocked from Europe, and that the row could undermine France’s upcoming presidency of the Group of 20 countries.

France joined European diplomats and lawmakers on Wednesday in the latest attempt to break the impasse on the shape of the new EU rules.

But negotiations remain difficult after Lagarde warned last week she would stand her ground in opposing part of the law that would make it easy for foreign funds to work in the EU.

Lagarde believes issuing a 27-country EU licence to foreign funds would be a mistake because controls on those operators are unlikely to be tight. Others suspect her of taking a swipe at London, whose fashionable West End is home to most European hedge funds.

In his letter, Geithner writes: “A proposal that limits or delays the access of third country firms to a passport — while granting EU domiciled managers and funds access to the European market — would be discriminatory and contrary to G20 commitments.”

“We would consider adoption of such a proposal as unfair and damaging to our shared interest in maintaining an open, global financial system.”

POLITICAL WRANGLE

Diplomats said last week that Germany had sided with Lagarde, strengthening her position but putting Berlin in Washington’s line of fire.

Geithner sent a separate letter outlining his concerns to German finance minister Wolfgang Schaeuble on Tuesday.

George Osborne, the British finance minister, who has argued on the side of Washington for an EU licence for foreign funds, also received a letter from Geithner explaining his position.

The German and French finance ministries declined to comment.

Despite being one of the EU’s more modest financial reforms, Brussels’ attempts to change the rules for hedge funds, chiefly by putting them under the watch of a new pan-European supervisor, has taken what one industry expert called a totemic significance.

It put French President Nicolas Sarkozy at loggerheads with Britain, which has fiercely defended an industry London sees as important for its status as Europe’s financial capital but which one German politician dismissed as “swarms of locusts”.

The officials said the French challenge could undermine relations with Washington as Sarkozy prepares to chair meetings of the G20 from November. Such gatherings are an important forum for tackling the global economic crisis and deciding financial reform.

Geithner also sent a copy of his letter to Michel Barnier, the French commissioner in charge of EU financial reform.

Barnier acts as an honest broker in resolving such disputes but the former French minister, who was appointed by Sarkozy, will struggle to untangle what has become an intensely political row.

Last week, diplomats said Germany had offered its support to Lagarde on the understanding Paris would side with it in negotiations about controlling country spending in the EU, a sweeping reform that overshadows hedge fund rules.

By John O’Donnell

(Editing by David Brunnstrom and Susan Fenton)