Guard Against the Strong Inﬂ uence
Brought by Subprime Lending Crisis
Given By: Mr. Ron Nechemia, the Chairman of Board of EurOrient with
Mrs. Luyang Li, Editor-in-Chief from International Finance Magazine on May 16, 2008.
IFM: Can you share with me ing growth. In the emerging markets,
your views about the subprime inﬂ ation has risen more markedly,
mortgage market crisis in the reﬂ ecting both strong demand growth
and the greater weight of energy, but
particularly food in consumption bas-
Mr. Nechemia: The global expan-
sion is losing speed in the face of a
major ﬁ nancial crisis. The slowdown
has been greatest in the advanced IFM: What are the other
economies, particularly in the United driver(s) that inﬂ uence the
States, where the housing market global economy and introduce
correction continues to exacerbate further economic instabilities?
ﬁ nancial stress. Among the other
advanced economies, growth in West-
Mr. Nechemia: High food prices
ern Europe has also decelerated. The are threatening recent gains in over-
emerging and developing economies coming poverty and malnutrition, and
have so far been less affected by ﬁ nan-
are likely to persist over the medium
cial market developments and have term. Poor people are suffering daily
continued to grow at a rapid pace, led from the impact of high food prices,
by China and India, although activity is
especially in urban areas and in low
beginning to slow in some countries.
income countries. In some countries,
hard-won gains in overcoming poverty
The ﬁ nancial shock that erupted in may now be reversed.
August 2007, as the U.S. subprime
mortgage market was derailed by the
For many countries and regions where
reversal of the housing boom, the progress in reducing poverty has been
negative impact has spread quickly
slow, the negative poverty impact of
and unpredictably to inﬂ ict extensive rising food prices risks undermining
damage on markets and institutions at
the poverty gains of the last 5 to 10
the core of the ﬁ nancial system.
years, at least in the short term. For
Mr. Ron Nechemia is a member of United
example, in the case of Yemen, esti-
Nations Investment Advisory Council
The fallout has weakened capital ad-
mates show that the doubling of wheat
(UNCTAD/ICC), he is also the member of the
equacy at major banks, and prompted prices over the last year could reverse
Advisory Committee to the Organization for
the re-pricing of risk across a broad all gains in poverty reduction achieved
Economic Co-operation and Development
range of instruments. Liquidity between 1998 and 2005.
(OECD) and a member of China Sub-
remains seriously impaired despite ag-
gressive responses by major central While the urban poor are most af-
committee on WTO and Advisor to the G77
banks, while concern about credit fected, it is worth remembering that
+ 1. As a highly successful entrepreneur, he
risks has intensiﬁ ed and extended far most rural people are buyers rather
has a unique vision on the global ﬁ nance
beyond the subprime mortgage sec-
than sellers of food. There could well
integration brought about by new challenges
tor. Equity prices have also retreated
be severe effects for landless rural
and opportunities faced by the international
as signs of economic weakness have
workers whose subsistence wages may
community. “International Finance Magazine”
intensiﬁ ed, and equity and currency not increase apace with food prices.
interviewed Mr. Nechemia on the issue
markets have remained volatile.
of the inﬂ uences on the global economy
The impacts of the recent surge in
instigated by the subprime mortgage crisis.
At the same time, inﬂ ation has in-
food prices are reverberating across
He believes the inﬂ uence on the global
creased around the world, boosted key dimensions of the development
economy by the subprime mortgage crisis
by the continuing buoyancy of food agenda, including poverty alleviation,
it is just the beginning and that we must pay
and energy prices. In the advanced macroeconomic stability, investment
careful attention to it.
economies, core inﬂ ation has edged incentives and energy security/climate
upward in recent months despite slow-
change policies. Because it is capable
2 0 0 8 J U N E ¦ 35
of weaving together the economic, poverty, Mr. Nechemia: The overall balance of this conclusion reﬂ ects the United States’
social, agricultural and environmental per-
risks to the short-term global growth outlook
substantial ties with Asian and other econo-
spectives, we need to catalyze global action
remains tilted to the downside. Growth will mies whose currencies are undervalued.
and inﬂ uence the international agenda.
drop to 3 percent or less in 2008 and 2009—
China can contribute greatly to this end and
equivalent to a global recession. The greatest
seek to improve global outcomes, many of risk comes from the still-unfolding events in
IFM: How should China deal with
which are of direct consequence for middle-
ﬁ nancial markets, particularly the potential the sub-prime loan crisis?
for deep losses on structured credits related
to the U.S. subprime mortgage market and
Mr. Nechemia: Policymakers makers
other sectors that would seriously impair in China and elsewhere should be ready
IFM: What is your suggestion to
ﬁ nancial system balance sheets and cause to respond to a more negative external
overcome these issues and obstacles the current credit squeeze to mutate into a environment, which could undercut trade
in the face of such crisis?
full-blown credit crunch.
performance and stiﬂ e capital inﬂ ows. In
many countries, strengthened policy frame-
Mr. Nechemia: I called for action to
works and public sector balance sheets will
tackle hunger and malnutrition in a world
IFM: How does the subprime mort-
allow for more use than in the past of coun-
of rising food prices. Relieving people from gage market crisis in the U.S. impact tercyclical monetary and ﬁ scal policies. In
hunger and malnutrition are at the heart of China, and the rest of the world?
China, the consolidation of the past several
the Millennium Development Goals (MDG).
years provides ample room to support the
It has gotten less attention, but increased Mr. Nechemia: Two forces—ﬁ nancial economy through ﬁ scal policy, such as by
food prices and their threat – not only to market turmoil, and the sharp rise in energy
accelerating public investment plans and
people but also to political stability – have and commodity prices—have combined over
advancing the pace of economic reforms
made it a matter of global urgency to draw
the past year to push the global economy off
in order to strengthen social safety nets,
the attention it needs.
the path of solid growth and low inﬂ ation promote better health care, and improve
that had prevailed since 2003. Growth in education system.
all of the G-7 economies will have slowed
IFM: How severely does the sub-
to a below-trend pace by this year’s ﬁ nal Emerging and developing economies face
prime mortgage market crisis in the quarter, while headline inﬂ ation will exceed the challenges of controlling inﬂ ation while
U.S. inﬂ uence the global economy?
monetary policymakers’ medium term goals.
being alert to downside risks from the
Moreover, growth in emerging economies rapid slowdown in the advanced economies
Global growth is will slow as well, even though their average
coupled with the increased stress in ﬁ nan-
projected to slow to 3.7 percent in 2008. growth pace will remain substantially faster
cial markets. In some countries, further
Moreover, growth is projected to remain than in the advanced economies.
monetary policy tightening may be needed
broadly unchanged in 2009. The divergence
to keep inﬂ ation under control. In the case
in growth performance between the ad-
One of keys to successful global recovery is
of China, more ﬂ exible exchange rate policy
vanced and emerging economies is expected
to restore US growth to a trend pace. Persis-
and currency appreciation will tend to pro-
to continue, with growth in the advanced tently weak US growth would signiﬁ cantly
vide useful support for monetary tightening.
economies generally expected to fall well inhibit a return to trend growth in other ad-
Countries whose exchange rates are heavily
vanced economies, and could undermine managed in relation to the U.S. dollar have
growth in emerging economies as well.
less room to respond because rising interest
The U.S. economy will tip into a mild recession
rates may encourage heavier capital inﬂ ows.
in 2008 as the result of mutually reinforcing
Restoring US growth will require, among China and other countries that have diversi-
cycles in the housing and ﬁ nancial markets, other things, an end to the price declines ﬁ ed economies would beneﬁ t from moving
before starting a modest recovery in 2009 as
in US residential real estate that are still toward more ﬂ exible regimes that would
balance sheet problems in ﬁ nancial institu-
underway. It also will require the return to provide greater scope for monetary policy.
tions are slowly resolved. Activity in Western
more normal conditions in credit markets,
Europe is also projected to slow to well below
and a restoration of consumer conﬁ dence.
potential, owing to trade spillovers, ﬁ nancial Attaining these results primarily are the re-
IFM: In the face of the U.S. sub-
strains, and negative housing cycles in some
sponsibility of the US authorities. However, prime mortgage market crisis, is now
countries. By contrast, growth in emerging restoring a sustainable global expansion—
a good time for Chinese enterprises
and developing economies is expected to ease
that is, trend growth accompanied by low to make overseas investment? And,
modestly but remain robust in both 2008
and stable inﬂ ation and by declining global which is bigger, the opportunity or
and 2009. The slowdown reﬂ ects efforts to imbalances—will require stronger domestic the crisis?
prevent overheating in some countries as demand growth in the advanced economies
well as trade and ﬁ nancial spillovers and outside the US.
Mr. Nechemia: Global economic in-
some moderation in commodity prices
Despite widespread concerns about the dol-
tegration is not a new phenomenon. Some
lar’s recent decline versus some currencies, communication and trade took place be-
the US currency is at present only at—or
tween distant civilizations even in ancient
IFM: What is the overall balance slightly stronger than—its medium-term times. Since the travels of Marco Polo seven
of risks to the short-term global equilibrium on a broad trade-weighted and centuries ago, global economic integration—
inﬂ ation adjusted basis. As is well known,
through trade, factor movements, and
36 ¦ 2008 JUNE
communication of economically useful 60 million retail investors account for ital Deals, published by Aspatore Books, (
knowledge and technology—has been on a 80% of market activities and investments.
ISBN: 9781596228122), is an authoritative
generally rising trend.
However, a number of issues constrain
insider’s perspective on the venture capital
the full development of the equity market.
industry for both VCs and entrepreneurs,
This process of globalization in the eco-
Weaknesses in regulation, market surveil-
with a focus on understanding the positions
nomic domain has not always proceeded lance, compliance, and enforcement have of each major player involved in venture
smoothly. Nor has it always beneﬁ ted all encouraged a high degree of volatility and capital and private equity investments.
whom it has affected. But, despite occa-
The book features managing directors and
sional interruptions, such as following the
senior partners representing some of the
collapse of the Roman Empire, the Asian China shall continue to strengthen the World’s top VC and private equity ﬁ rms
Currencies Crisis or current U.S. subprime
regulatory and supervisory frameworks and it provides tactical advice for venture
mortgage market crisis impact on global
for the development of supplementary capitalists on spotting investment op-
economy, the degree of economic integra-
schemes through: (i) the effective imple-
portunities, establishing valuations, and
tion among different societies around the mentation of supported Securities Law evaluating the potential return on invest-
world has generally been rising. Indeed, which became effective in 1999; (ii) the ment. Likewise, this book offers strategies
during the past half century, the pace
strengthening of the China Securities Reg-
for entrepreneurs on choosing a venture
of economic globalization has been par-
ulatory Commission; and (iii) developing capital partner, negotiating deal terms,
ticularly rapid. And, with the exception of self-regulatory organizations at levels of and ﬁ nding the right management team.
human migration, global economic integra-
securities exchanges and securities market
With a detailed look at the overall land-
tion today is greater than it ever has been participants.
scape of the industry and common trends
and is likely to deepen going forward.
in the marketplace, these experts provide
The rise in China’s shares have made its
key strategies for analyzing a company’s
The increase in food and energy prices stocks the most expensive among the vision, evaluating growth potential, con-
creates an opportunity for the Chinese world’s major markets and the market will
ducting due diligence, and determining
enterprises to refocus on investments in make an adjustment sooner or later, and an exit strategy. Additionally, these top
agriculture and by doing so to contribute prices are likely to decline.
venture capitalists offer tips for manag-
social protection. The structural shift in
ing risks, avoiding common mistakes, and
food and energy prices created an op-
However, in the short-to-medium-term ultimately negotiating successful deals.
portunity for the Chinese private sector there are also issues that are impacting the
The different niches represented and the
and for state-owned enterprises to work future progress and development of the breadth of perspectives presented enable
together with partner countries, such as equity market that needs to be addressed.
readers to get inside some of the great
the countries from the African continent Mainly, there are ﬁ ve reasons for not in-
minds powering the venture world. Also,
in the case of China, and to build political vesting in China: (1) the mismanagement experts offer up their thoughts around
coalitions that can mobilize the necessary
of the state-run companies constitutes a the keys to success within this fascinating
investment. These activities will help to large risk; (2) the mainland exchanges’ in-
industry—where investing, strategizing,
positively exploit the problem of under-in-
tra-year volatility discourages short-term and deal-making intersect.
vestment in agriculture and to build better
investments; (3) the export sector’s per-
safety nets to help the poor cope with their
formance might decline as the economic The Chapter - “Financing Innovative
endemic high levels of risk. Such invest-
outlook for China’s biggest trade partners Small and Medium Enterprises in a Global
ments will be mutually beneﬁ cial to both has been marked down by the International
Economy” was written in dedication to and
investor and to society at large. Further-
Monetary Fund, (“IMF”); (4) the institu-
memory of Dr. Heribert Golsong.
more, the investment will be sustainable tional framework is largely responsible for
for the foreseeable future.
many risk factors such as scarce market
In Brussels in April 2, 2000, EurOrient Fi-
information, lack of insight and public nancial Group lost its most distinguished
control; (5) a tougher competition climate Member of the Board of Directors; the
IFM: What recommendation do after the entry in the World Trade Orga-
international community lost one of the
you have regarding how to improve
nization (“WTO”) may affect several of world’s most distinguished human rights
the capital market, and particular-
China’s industries, causing bankruptcies and bilateral investment treaties legal
ly the equity segment of the capital and mergers but also a speeding up of the scholar and practitioner as well as an au-
market in China?
thoritative ﬁ gure; the world lost a great
man and I have lost my very dearest friend
Mr. Nechemia: China’s equity market
and a mentor, Prof. Dr. Heribert Golsong.
has undergone impressive growth in the IFM: Can you give me a brief
last ten years. Market capitalization grew introduction about the book you Co-
Dr. Heribert Golsong passed away as he
from US$2 billion in 1991 to US$525 bil-
authored together with 7 managing and I were working together toward the
lion by end of 2001. Currently, there are directors and senior partners rep-
formation of the EurOrient Private Equity
approximately 1,206 listed companies and resenting some of the world’s top Management Group (EPEMG), which was
100 brokerage ﬁ rms, though the potential venture capital (“VC”) and private headquartered in Geneva, Switzerland in
for future growth of the equity market is equity ﬁ rms?
the year 2000. EPEMG was created to act
enormous. The Shanghai and the Shen-
as the manager of private equity invest-
zhen Stock Exchanges each average 1-2 Mr. Nechemia:
The Roles and ment funds created to invest in emerging
million transactions per day. More than Motivations of Key Players in Venture Cap-
market countries. EPEMG’s mandate is to
2 0 0 8 J U N E ¦ 37
make a variety of equity and quasi-equity established. It has since decided some 230
investments with fund assets in support of
disputes between the Bank and staff mem-
the EurOrient Financial Group’s mission. bers.
These investments may include warrants,
options or other quasi-equity or equity-
During Dr. Golsong’s tenure as Secretary-
related instruments, as well as convertible General of ICSID, the number of cases
debt investments in various forms. EPEMG
submitted to ICSID almost doubled. He
is seeking to widen the range of ﬁ nancial took great interest in the growing spread of
instruments and ﬁ nancial solutions that bilateral investment treaties that now are
are available to emerging market project so central to ICSID’s dispute-settlement
sponsors and entrepreneurs. The Fund’s activities. In this regard, Dr. Golsong also
investments required to have a demonstra-
launched the Centre’s multi-volume collec-
bly positive development impact, however, tion of such treaties (entitled Investment
such as improved quality of life and pov-
Treaties). Other ICSID publications intro-
erty reduction through sustainable and duced by Dr. Golsong included the Centre’s
ﬁ rst newsletter.
EurOrient Private Equity Management After leaving the World Bank and ICSID,
Group has been created to ﬁ nancially Dr. Golsong entered private legal practice,
engineer and manage special purpose spending over a decade with the law ﬁ rm
investment funds such as funds for in-
of Fulbright & Jaworski. Highlights of
vestment in infrastructure development, this part of Dr. Golsong’s career included
including environmental infrastructure, service as lead counsel for the claimant in
small and medium enterprises, science and
the ﬁ rst ICSID arbitration brought under a
technology, and media. EPEMG oversees bilateral investment treaty (Asian Agricul-
and advises investment funds on opera-
tural Products Limited v. Sri Lanka) and as
tions, including investigating, structuring,
an arbitrator in the second ICSID arbitra-
and negotiating potential investments by tion of this kind (American Manufacturing
the funds; monitor the performance of and Trading, Inc. v. Democratic Republic of
portfolio investments; and advise on the the Congo).
disposition of portfolio holdings.
Dr. Golsong started working with Eu-
Dr. Golsong was Vice President and Gen-
rOrient Financial Group in 1998 on the
eral Counsel of the World Bank from 1979 formation of the EurOrient Private Equity
to 1982 and, from 1980 to 1983, Secretary-
Management Group and the establishment
General of the International Centre for of the EurOrient International Infrastruc-
Settlement of Investment Disputes (IC-
ture Fund., a USD$ 1 billion Fund. The
Fund’s investment objective is to achieve
substantial long term capital appreciation
He was born in Oberhausen, Germany through the purchase, holding and disposi-
and received a doctorate in law from the tion of equity and equity-like interests in
University of Bonn. He also studied at the
entities involved in infrastructure projects
Universities of Cologne and Würzburg, at (“Portfolio Companies”) in developing and
the College of Europe and at the Hague emerging countries. Dr. Golsong passed
Academy of International Law.
away in Brussels, April 2, 2000, as we
were drafting the Fund’s private placement
Before joining the World Bank and ICSID, memorandum.
Dr. Golsong had served as Secretary to the
European Commission on Human Rights Dr. Golsong received an honorary doctorate
(1954-1957), Deputy Registrar (1960-1963) from the University of Edinburgh and an
and Registrar (1963-1968) of the European
honorary professorship at the University of
Court of Human Rights, Director of Legal Heidelberg. His other honors included or-
Affairs at the Council of Europe (1964-
ders of merit from Germany, Lichtenstein,
1977) and Director of Human Rights at the
Norway and Austria. IFM
Council of Europe (1977-1979).
While Dr. Golsong was the World Bank’s
Vice President and General Counsel, the
World Bank Administrative Tribunal was
38 ¦ 2008 JUNE