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. Last Updated: 07/27/2016

Industrialized Nations To Study Hedge Funds

WASHINGTON -- Leading industrial nations have agreed to take a look at the role exotic financial products and big speculators played in recent market turmoil. But in a statement issued at the semi-annual meeting of the International Monetary Fund and World Bank, the Group of 10 industrial nations gave the world's monetary system high marks for weathering the storm without breaking down. "Financial markets functioned well, coping with the increased volume of transactions without creating tensions," said the G-10, an 11-member grouping comprising the Group of Seven plus Belgium, the Netherlands, Sweden and Switzerland. At the same time, the powerful policymaking Interim Committee said it would study systemic risks in the tumultuous financial markets, including looking at ways to bring more discipline to currency markets. "We agreed that this examination should include a study on possible ways to introduce a higher degree of discipline in the present exchange rate system," Belgium Finance Minister and Interim Committee Chairman Philippe Maystadt said. IMF Managing Director Michel Camdessus, attending the briefing at which Maystadt spoke, following the committee's discussions, seemed to rule out the IMF recommending coordinated intervention to smooth volatile currency markets. Long-term interest rates have shot higher around the world in recent weeks and stock and bond prices have sagged as speculators and investors scrambled to adjust positions following moves by the U.S. Federal Reserve to tighten credit. Some analysts have blamed the recent global bond market plunge on fears that major nations will shy away from taking tough action necessary to hold inflation in check as their economies turn around. Others have pointed the finger at highly leveraged "hedge funds" run by big-time speculators such as George Soros and increased trading of exotic financial products, known as derivatives, for the market unrest. Hedge funds are managed accounts that put money in a wide range of investments, favoring futures markets and financial instruments that require little cash and can bet on the direction of interest rates or entire markets. The fund managers take a percentage of the profits. The G-10 nations tended to dismiss the macroeconomic argument for the market volatility, saying the outlook for inflation was favorable. Their position seemed to be widely reinforced and the Interim panel agreed inflation seemed low and conditions were improved for a sustained recovery. But the committee made clear that countries cannot rest on their laurels and should continue to press ahead to ensure the long-awaited recovery does not stall. The G-10, for its part, seemed to give some credence to concerns that wealthy and risk-taking speculators were causing volatility, saying the question deserved a closer look. The study by the Interim Committee on how markets operate as well as the examination by the G-10 will be reviewed at the IMF and World Bank's next meeting in Madrid in October. Currency markets have held relatively steady in recent weeks despite the turmoil in bond markets. Policymakers signaled that they want it to stay that way. A top German Finance Ministry official said the current exchange rate of the mark against the dollar of around 1.70 was reasonable for Germany on an economic basis. "The current rate of about 1.70 is more or less a sensible rate," said German State Secretary to the Finance Ministry Gerd Haller. In speeches to the IMF's policy-making Interim Committee, policymakers from G-7 nations repeated their upbeat refrain from Sunday -- that the world economy is poised for faster growth without generating much, if any, inflation. Treasury Secretary Lloyd Bentsen said the U.S. upturn was gaining strength. Bank of Japan Governor Yasushi Mieno said his country's economy was on the verge of a recovery. And German Finance Minister Theo Waigel saw brighter times ahead for Germany's economy.