Germany turned up the pressure last night on Britain and the United States to open their hedge funds to greater scrutiny, as its Finance Minister sounded warnings that leaving their activities unchecked could have dire consequences for the world economy.

Peer Steinbröck urged the world’s richest nations to agree on a strategy to deal with the lack of information about hedge funds as he opened the G7 finance ministers’ meeting in the German city of Essen.

Mr Steinbröck said that the highly leveraged and secretive hedge fund industry, which manages an estimated £700 billion worldwide, posed “systemic risks” to the economic tranquillity of recent years.

“Any mistakes in the hedge funds’ calculations may well trigger off a vicious circle which will have negative implications similar, or even worse, than the financial crises we saw in the 1990s,” he said.

Some 70 per cent of Europe’s hedge funds are based in London and as much as 90 per cent do their banking there. Mr Steinbröck denied that the discussions were targeted at the UK. He told reporters: “We wouldn’t have put this on the agenda if our British colleagues would not have been willing to discuss it.”

He refused to be drawn on specific proposals, suggesting he did not want to undermine the possibility of reaching a consensus by being too outspoken in public.However, unlike other German politicians, Mr Steinbröck said he believed that hedge funds did have a positive role to play in improving capital flows and weeding out the inefficiencies in poorly managed companies.

Franz Möntefering, Germany's Vice-Chancellor and a fellow member of Mr Steinbröck’s left-leaning SPD party, last year described hedge funds as “locusts”. That remark was repeated yesterday by a balloon-waving crowd that demonstrated against hedge funds outside the Essen concert hall where the Finance Minister spoke to reporters.

Germany has set out a sprawling agenda for the weekend’s discussions, from world trade talks and reform of the International Monetary Fund, to good governance in Africa.

Mr Steinbröck said he was optimistic that the Doha Round of World Trade Organisation talks could resume late this month or early in March after talks with his Chinese and US counterparts ahead of the meeting.The yen’s sharp decline continued as investors grew more certain that finance ministers will offer no opinion on the currency’s weakness. It fell against the euro for the fourth straight session and against the dollar for the third in a row.

Full agenda

The meeting will consider:

Improving the stability of global financial markets

Fiscal policy to promote energy efficiency and renewable energy

Good governance in Africa

IMF reform

Promoting bond markets in emerging markets

Exchange rates

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