FINANCIAL regulators in all EU countries are to be asked today to prepare for the collapse of a big hedge fund or a similar sudden financial shock. EU finance ministers and central bankers, meeting in Vienna, were told that the collapse of a hedge fund could now destabilise European financial systems as well as the financial markets.

They have equally raised anxieties about the rapid growth of private equity. They fear that this could unravel if one of the key sources of funds or markets for selling on companies dries up. Officials also argue that many regulators do not understand the risks involved in the £10,000 billion market in credit derivatives, which are traded privately between banks rather than on public exchanges.

A private report drawn up by finance ministry officials of EU states says: “Hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systems risks.” The report urges the central banks and regulators to monitor banks’ exposure to hedge funds, both as lenders and as counterparties to massive speculative positions in financial and commodity derivatives. Banks are also heavy lenders to private equity buyouts, which provide them with more profitable but riskier business.

The officials complain that many of the EU’s financial regulators have simply failed to take the precautionary measures that were agreed by finance ministers, including Britain’s Gordon Brown, two years ago. They want ministers to call for their national regulators to run detailed simulation exercises to find out what they would need to do if faced with a domino collapse of liquidity or asset values in their markets. The biggest hedge fund collapse so far occurred eight years ago at the US fund Long Term Capital Management but it involved heavy positions in European asset markets. It led to Alan Greenspan, then chairman of the US Federal Reserve Board, organising an international support plan for LTCM and standing ready to supply cash to the financial markets if required.

Jean-Claude Trichet, the President of the European Central Bank, has created an otherwise upbeat atmosphere about the eurozone economy at the weekend talks hosted by Austria, which holds the EU presidency. After Thursday’s ECB meeting, which left interest rates unchanged, M Trichet said that it would be wrong to assume that a further rate rise would come in May.

As central bankers now usually try to prepare markets for rate changes rather than to surprise them, EU ministers now assume that rates will not be raised next month in spite of much hawkish talk.

NEW EURO NATION

• Slovenia, the first part of the former Yugoslavia to join the European Union, is likely to become the thirteenth member of the eurozone next January after passing all the tests for membership. Lithuania, which had also hoped to join next year, is thought to have been rejected because it failed the Maastricht inflation test.

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