Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Allaway. My co host Joe Wisenthal is away
Speaker 1: this week. So the entire world has been watching the
Speaker 1: outbreak of a deadly new coronavirus, and I have to say,
Speaker 1: I'm recording this podcast from my apartment in Hong Kong,
Speaker 1: and a lot of workers in the city have now
Speaker 1: been asked to work from home. And as I'm recording,
Speaker 1: there's this huge thunderstorm outside, So apologies if you hear
Speaker 1: in the background, but I gotta say, the entire atmosphere
Speaker 1: of Hong Kong at the moment feels kind of apocalyptic.
Speaker 1: This morning, China just reported an extra fifteen thousand coronavirus
Speaker 1: cases after changing its methodology for diagnosis, and that takes
Speaker 1: the total cases to more than fifty in who the
Speaker 1: province alone own the epicenter of the outbreak. Deaths are
Speaker 1: now well over a thousand people. That's according to official numbers,
Speaker 1: and of course there's a lot of doubt surrounding those
Speaker 1: official numbers. And in between sort of obsessively checking my
Speaker 1: temperature all week and trying to find masks in Hong Kong,
Speaker 1: most of them are sold out. There's another thing that
Speaker 1: I've been obsessing over, and that is the World Bank's
Speaker 1: catastrophe bonds. Now, these aren't just any catastrophe bonds. CAT
Speaker 1: bonds are typically linked to things like hurricanes and earthquakes
Speaker 1: and other natural disasters. But the ones we're going to
Speaker 1: be talking about today are a three D twenty million
Speaker 1: dollar cat bond issue back in that's linked to pandemics.
Speaker 1: In fact, it's the first pandemic bond ever and it
Speaker 1: was sold in response to the Ebola outbreak from a
Speaker 1: few years ago, and the bond basically backs the World
Speaker 1: Banks Pandemic Emergency Financing Facility, that the thing that is
Speaker 1: used to fund biding these kinds of global outbreaks. Now,
Speaker 1: the idea behind the bonds is that there are a
Speaker 1: way for investors to bear some of the financial risk
Speaker 1: of a global pandemic. If an outbreak gets bad enough,
Speaker 1: then the bonds get triggered and their principal value gets
Speaker 1: paid into the World Banks account to help fund containment
Speaker 1: efforts against whatever disease is currently reaking havoc. In the meantime,
Speaker 1: investors get to earn interest, and I ought to say
Speaker 1: it's pretty good interest. The riskiest trench pays about I
Speaker 1: think over libor, and the least risky trench pays something
Speaker 1: like seven percent over libor. Now I just mentioned riskiest
Speaker 1: trench and the least risky trench, and as you can imagine,
Speaker 1: there are different payout triggers for different parts of the bond,
Speaker 1: and they come into action at different points in time.
Speaker 1: And defining a pandemic isn't something that normally comes up
Speaker 1: a lot in finance. I think it's worth digging into
Speaker 1: these bonds to see exactly what those triggers look like,
Speaker 1: what the structure looks like, looks like, how people in
Speaker 1: finance think about global pandemics, and also what we can
Speaker 1: learn about pandemic containment efforts in general. And so today
Speaker 1: we're going to talk with one of the critics of
Speaker 1: the bonds, but also someone who has a lot of
Speaker 1: experience from an economics perspective with pandemics. Our guest is
Speaker 1: Olga Jonas of the Harvard Global Health Institute and also
Speaker 1: a former economist at the World Bank. Olga, thanks so
Speaker 1: much for coming on, um, thank you very much, very
Speaker 1: glad to be here. So I guess my first question
Speaker 1: is how did you get interested in this particular bond
Speaker 1: issue because I've seen you on Twitter and you tweet
Speaker 1: quite a lot about it, and of course there aren't
Speaker 1: that many people out there on social media who are
Speaker 1: talking about pandemic bonds. Yeah. Well, I mean the origin
Speaker 1: it was that I was working. I'm a macro economy
Speaker 1: but in two thousand and five I was in a
Speaker 1: central policy department at the World Bank, and it was
Speaker 1: at that time that the international response to a van
Speaker 1: influenza and the pandemic threat from avian influenza was launched.
Speaker 1: And you know, just was a fortunitous coincidence that I
Speaker 1: was in the department where this this response was managed
Speaker 1: for the World Bank. So I got very interested in
Speaker 1: pandemics and pandemic risk because it's really very much underappreciated
Speaker 1: and it's not studied very seriously because between episodes of emergency,
Speaker 1: people forget about this risk and and it's not um
Speaker 1: something that they worry about, which is a mistake. And
Speaker 1: as we went through the response to a vin and
Speaker 1: pandemic influenza from two thousand five to two thousand ten,
Speaker 1: you know, it became clear that the world is not
Speaker 1: ready for a pandemic, that there are just you know,
Speaker 1: the capacities to prepare and and to prevent such a
Speaker 1: catastrophic event, you know, are feasible, but they are just
Speaker 1: not there in the poorest counties. So we became very
Speaker 1: interested in sustaining the momentum from the Avian food response
Speaker 1: into you know, building the capacities to prevent and to
Speaker 1: be better prepared for the next episode, which will necessarily come,
Speaker 1: as they say, you know, it's not a matter of if,
Speaker 1: but when. UM. But unfortunately this was sidelined UM, and
Speaker 1: you know, it just didn't occur, and that was very disappointing,
Speaker 1: UM experience, very frustrating. And then you know, the Abole
Speaker 1: outbreak in two thousand fourteen was a reminder that poor counties.
Speaker 1: This was in West Africa where we saw that you know,
Speaker 1: it devastated the economies and then too many people died
Speaker 1: in Liberia and cra Leone and Guinea uh And afterwards
Speaker 1: there was momentum to sort of renew the efforts towards
Speaker 1: being prepared next time, and instead of focusing on the
Speaker 1: capacities in the countries, the World Bank went this other route.
Speaker 1: But unfortunately it's you know, it was not a priority
Speaker 1: in the priorities definitely in the countries to be very prepared,
Speaker 1: and this was very much a response, well, what if
Speaker 1: there is a pandemic, I mean, how do we get
Speaker 1: more money kind of response. But not only is that
Speaker 1: not a lower priority, but it also was shown to
Speaker 1: be not feasible to design it in a way that
Speaker 1: it would work. So it's you know, it's a it's
Speaker 1: it's a sort of an accumulation of sort of errors
Speaker 1: of judgment and analysis that brought us to where we
Speaker 1: are today. So just to back up for one second,
Speaker 1: so you're talking about, you know, the preferred way of
Speaker 1: dealing with a pandemic would be to have a domestic
Speaker 1: health care system that is capable of responding on its own,
Speaker 1: but there was a preference for figuring out some way
Speaker 1: to get additional money funneled into a particular country or
Speaker 1: against a particular series of countries if they're hit by
Speaker 1: the pandemic. So how exactly are these bonds supposed to work?
Speaker 1: How does the money get to the World Bank? Well,
Speaker 1: it's supposed to work the way a cat bond works,
Speaker 1: which you know there are parametric triggers, but it proved
Speaker 1: to be very challenging to define the triggers because it's
Speaker 1: very difficult to anticipate how an epidemic. You know, when
Speaker 1: it starts, it's an outbreak, and then it becomes an epidemic.
Speaker 1: And the idea is that you have to inter being
Speaker 1: as soon as possible at the beginning to prevent the spread, right.
Speaker 1: But but that's very difficult to anticipate what it will
Speaker 1: look like, and that's why in designing it, they shows
Speaker 1: triggers that are much later. There is in fact a
Speaker 1: condition that it has to be at least twelve weeks
Speaker 1: after the beginning of the outbreak before anything can be triggered,
Speaker 1: as well as the number of deaths, you know, the
Speaker 1: high number of deaths and the growing rate of the outbreak,
Speaker 1: So that means that it's triggered much too late. But
Speaker 1: if it was triggered earlier, then the price of the
Speaker 1: insurance would be much higher, right, because there's just so
Speaker 1: much uncertainty in the modeling, And much of the uncertainty
Speaker 1: in the modeling is due to the lack of data
Speaker 1: on these kinds of events, and the lack of data
Speaker 1: is due to the lack of public health systems in
Speaker 1: developing countries, which is what is needed to invest in,
Speaker 1: not health care systems. You know, it's not all health care.
Speaker 1: It's not hospitals and clinics and all that. It's just
Speaker 1: the basic it's called core public health functions, which is
Speaker 1: the capacity to detect, to diagnose, and to respond to
Speaker 1: an now the break, and that's not very expensive. It's
Speaker 1: in fact highly affordable compared to the benefits, and that
Speaker 1: hasn't been done. That's that's what has been sideline, and
Speaker 1: you need that to do to do modeling that would
Speaker 1: actually enable insurance maybe in thirty years from now, when
Speaker 1: the health systems are in place to generate the data
Speaker 1: that you need to do the modeling. So there seems
Speaker 1: to be attention here because obviously, if you're fighting a pandemic,
Speaker 1: you want this extra money as soon as possible. But
Speaker 1: the terms of the bonds make it difficult for them
Speaker 1: to pay out because a you have this sort of
Speaker 1: twelve week limit that you just mentioned, and you also
Speaker 1: have to have deaths that take place in other countries
Speaker 1: outside of the original outbreak country. You mentioned that data
Speaker 1: is quite hard to get um when there is a
Speaker 1: global pandemic. So who's who's the arbiter of when these
Speaker 1: bonds actually pay out. How do they verify that the
Speaker 1: trigger has actually been met? Well, there is actual verification
Speaker 1: of the triggers is spelled doubt in the prospectives of
Speaker 1: the for the bonds, which is three eighty six pages long,
Speaker 1: and there is a verification agent which is uh, you know,
Speaker 1: af firm. It's a commercial contract between the World Bank
Speaker 1: and the and the verification agent, and they are going
Speaker 1: to ascertain whether all the triggers have been met. But
Speaker 1: the triggers are triggers have been described as a maze
Speaker 1: of confusion. So you know, this is not a trivial
Speaker 1: exercise to verify ideas triggers because it's it's really quite complex.
Speaker 1: I mean, it takes three eight six pages to set
Speaker 1: out the terms of the bonds. So when the verification
Speaker 1: agent notifies the World Bank that, you know, the triggers
Speaker 1: have been met, then the World Bank would get the
Speaker 1: money from the bond bonds because it's holding a means
Speaker 1: holding that money, right right, what's the maximum payout that
Speaker 1: the World Bank could get? Well, that's that's the other
Speaker 1: issue that's very disappointing in this whole experience is that
Speaker 1: for coronavirus um, when you look at it. The first
Speaker 1: payoffs if it happens, right, I mean there's no certainty. No,
Speaker 1: I mean there's no way of telling, at least from
Speaker 1: where I said, whether it will happen. It will be
Speaker 1: hundred and thirty one million dollars and the maximum payout
Speaker 1: is one hundred and nineties six million dollars, and that
Speaker 1: will have to be divided among the seventy six poorest countries.
Speaker 1: It's about eight cents per capita because there are one
Speaker 1: point more than one point six billion people in the
Speaker 1: poorest countries that are eligible to get the proceeds. So
Speaker 1: it's eight cents per capita, which you know, and when
Speaker 1: you compare it to what China is already spending on
Speaker 1: its response, right, which we have all seen on UM
Speaker 1: the dramatic images of hospitals being built in one weekend
Speaker 1: and post cities under quarantine, and they have announced that
Speaker 1: they have already allocated ten billion dollars for their response,
Speaker 1: so you can see that. You know, if the poorest
Speaker 1: countries in the world with more a bigger population than
Speaker 1: China to together, they will get only um, you know,
Speaker 1: a fraction of what China is all is spending, so
Speaker 1: it will not make much difference. It will be too little,
Speaker 1: too late. Do you think the bonds will trigger for
Speaker 1: the coronavirus out I hope they do, you know, I mean,
Speaker 1: I really hope they do. Because the tragic one of
Speaker 1: the sort of tragic aspects of this is that in
Speaker 1: fact the payment for the cost of the bonds that
Speaker 1: needs the premiums and the interest and the fees that
Speaker 1: were you know, associated with this pretty complicated transaction, that
Speaker 1: those add up to one and fifteen million dollars, and
Speaker 1: those funds actually came from funds that were intended for
Speaker 1: the poorest countries. They came from IDA, which is the
Speaker 1: soft clone window the World Bank, which is, you know,
Speaker 1: money that donors give for the World Bank to finance
Speaker 1: productive projects in the poorest countries. So that was fifty
Speaker 1: million from IDA. Then fifty million was donated by Japan.
Speaker 1: But I'm sure you know, the Japanese government intended that
Speaker 1: their donation of fifty million benefits the developing countries, benefits
Speaker 1: you know, the poorest countries, protect them from pandemics. And
Speaker 1: and then fifteen million was donated by Germany. So also
Speaker 1: you know, taxpayers, taxpayers in Germany, taxpayers in Japan. So
Speaker 1: altogether one and fifteen million has been paid for premiums
Speaker 1: when interests I mean for the interest and for the
Speaker 1: penniums and for the fees to beneficiaries or you know,
Speaker 1: two recipients who are not for who are in high
Speaker 1: income countries. I mean, these are investors who of course
Speaker 1: they invested their funds and they are you know, at
Speaker 1: risk of losing some of this money because of the triggers.
Speaker 1: But you know, that's a very high return, as you mentioned,
Speaker 1: it's still even over libel or seven percent over libor
Speaker 1: for the other branch. Um, those are very generous returns
Speaker 1: in today's market conditions. And um, you know then I
Speaker 1: think you mentioned when in your introduction that the idea
Speaker 1: was that the investors or the private markets would share
Speaker 1: some of the risks of the pandemic and you know,
Speaker 1: thereby thereby contribute. You know, in fact, when the pandemic
Speaker 1: wortions more than it is already and the anticipate that
Speaker 1: it will worsen, the markets will you know, decline, prices
Speaker 1: of assets fall, so investors are already going to be
Speaker 1: losing a lot of money just because there is a pandemic. Right,
Speaker 1: So these were pitched as sort of something that should
Speaker 1: kind of be uncorrelated with the broader market, But in
Speaker 1: fact whenever they trigger, if they actually trigger, it would
Speaker 1: probably be because something quite serious was happening, and therefore
Speaker 1: markets around the world would be falling anyway, exactly, So
Speaker 1: investors sort of get a double whammy. So for the investors,
Speaker 1: it's not that I don't see how there could be
Speaker 1: much of a diversification than a faith because these bonds
Speaker 1: are going to move with the market from the prices, right,
Speaker 1: So who are the investors who who bought these Who
Speaker 1: who's a typical buyer of this kind of bond? Well,
Speaker 1: I think I don't actually know. Um. I think if
Speaker 1: you know, they were just investors who buy cat bonds,
Speaker 1: who you want to see them in their portfolios as
Speaker 1: an element. Um I think there are some pension funds
Speaker 1: who bought it. But it's definitely the high returns have
Speaker 1: not been earned by developing countries, you know, I'm quite
Speaker 1: certain it's all high income investors. Do you think there's
Speaker 1: any way to structure this kind of bond in a
Speaker 1: way that would be satisfying or attractive for investors but
Speaker 1: also ultimately fulfill the purpose of a pandemic bond for
Speaker 1: public health, which presumably is getting extra money to the
Speaker 1: World Bank as soon as possible. No, well, number one,
Speaker 1: the World Bank does not need the money to respond
Speaker 1: to pandemics. You know, the World Bank is not a
Speaker 1: budget constraint entity. It's a bank. And IDA, the Fund
Speaker 1: for the Poorest Countries, is the largest multila all fund
Speaker 1: public fund to support development in poor countries, which includes,
Speaker 1: for the last fifty years, responding to emergencies. Because emergencies,
Speaker 1: you know, occur um a matter of I mean often, right,
Speaker 1: And IIDA has very you know, ample liquid assets. It
Speaker 1: has reserves, it lends, it makes new loans worth now
Speaker 1: twenty seven billion dollars every year, right, So, and the
Speaker 1: allocations are done on a three year basis. So now
Speaker 1: it's allocating eighty two billion dollars for every three years.
Speaker 1: It's a rolling process. Right. So there's you know, you
Speaker 1: cannot nobody can say that the World Bank needs more
Speaker 1: money in order to respond to outbreaks. The World Bank
Speaker 1: does have the money. And that's this that's the very
Speaker 1: purpose of the World Bank. I mean, that's why it
Speaker 1: was set up. It was set up to support countries
Speaker 1: in there. You know, for their priority needs. As circumstances change,
Speaker 1: and if there is a outbreak of a bola or coronavirus,
Speaker 1: the money is not the issue. The preparedness of the
Speaker 1: World Bank to respond to you know, delivered the financing
Speaker 1: on the ground, and the preparedness of the country too,
Speaker 1: you know, implement the activities that are necessary to control
Speaker 1: the outbreak. But money is not has never been the issue.
Speaker 1: I mean, if you have eighty two billion dollars in
Speaker 1: the fund, you do not issue bonds that library plus
Speaker 1: eleven to obtain a hundred and ninety six million in
Speaker 1: case there is a coronavirus. Right, It's just I mean,
Speaker 1: the World Bank has ample reserves to deal without outbreaks
Speaker 1: in either countries. So this was more of a sort
Speaker 1: of attention getting initiative, you know, to have an innovation,
Speaker 1: to try to innovate in this space. But it was
Speaker 1: not needed and it did not work. So I want
Speaker 1: to broaden out the conversation a little bit and go
Speaker 1: back to some of your experience as an economist dealing
Speaker 1: with other epidemics such as avian flew back in the
Speaker 1: early two thousand's. Um, what what lessons did you learn
Speaker 1: as an economist dealing with those sorts of epidemics, because
Speaker 1: I must admit I don't really know exactly what the
Speaker 1: role is of an economist at the World Bank in
Speaker 1: dealing with those kind of outbreaks. What did you actually
Speaker 1: do and what did you learned? Well, you know, what's
Speaker 1: astonishing is that how underappreciated the economics of epidemics where
Speaker 1: or still are, because there there's very little realization that
Speaker 1: if you act early and if you are prepared to
Speaker 1: stop the outbreak when it's just a few cases, you know,
Speaker 1: before it spreads, then in fact you are avoiding a
Speaker 1: huge cost later. And the huge cost is due to
Speaker 1: the exponentials threat, you know, the exponential growth that can
Speaker 1: happen with these diseases because like two people give it
Speaker 1: to four people, to you know, sixteen people, et cetera.
Speaker 1: It's you know, it's a very rapid progression of growth,
Speaker 1: and that's not understood by the by the sort of
Speaker 1: bureaucratic processes that we have in place to respond two disasters,
Speaker 1: you know, because usually it's a disaster that occurs and
Speaker 1: then there is an estimate of the costs of rebuilding,
Speaker 1: like in a hurricane or or in an earthquake, and
Speaker 1: then there are activities to rebuild, but in this case
Speaker 1: you are averting something that hasn't happened yet. Sort of
Speaker 1: there's an overreaction in reacting, but at the same time
Speaker 1: there's the lack of appreciation of how much money you
Speaker 1: saved by reacting early and being prepared. So that's why
Speaker 1: there's this repetition of you know, panic and then it's
Speaker 1: forgotten because in the health sector, there there are so
Speaker 1: many unmechands that people's attention shifts somewhere else. There's always
Speaker 1: some other priority. It's that comes up and catches attention,
Speaker 1: and then you know that accounts for the high costs
Speaker 1: of responding the next time. If the bank is not prepared,
Speaker 1: the countries are not prepared, it's very difficult. And we
Speaker 1: are seeing it again with coronavirus because basically from two
Speaker 1: thousand fifteen, which was the end of the end of
Speaker 1: the last epidemic that was sort of a major epidemic
Speaker 1: in West Africa, you know, not not much has happened
Speaker 1: to improve preparedness acause the worst countries. M HM. So
Speaker 1: you mentioned that after other disasters like a hurricane or
Speaker 1: an earthquake, there's sort of building activity that starts up
Speaker 1: immediately afterwards, and I would assume that that maybe helped
Speaker 1: stimulate the economy in one way or another. In your
Speaker 1: experience or in your research after a pandemic, what sort
Speaker 1: of economic impact does that have in the long term?
Speaker 1: Does the recovery, the economic recovery after a pandemic look
Speaker 1: different to the economic recovery after an earthquake or a hurricane.
Speaker 1: I mean, it's sort of a high level answers know
Speaker 1: that it's you know, macro economically set tempre a shock
Speaker 1: that bosses as soon as you know, the disruptions um
Speaker 1: of travel and the raid and and you know supply
Speaker 1: chains to Gemen, that comes to an end and things
Speaker 1: return to normal, and there's a um there's no permanent effect, however,
Speaker 1: in when this happens in poor, very poor countries, like
Speaker 1: what happened in West Africa and in thousands fourteen to sixteen,
Speaker 1: the Ebola outbreak had a very severe effect on the
Speaker 1: health care system. A large number of doctors and nurses died.
Speaker 1: And when you think of that in the context of
Speaker 1: a poor country that does not have enough doctors and nurses,
Speaker 1: and you know, these kinds of you know, human capacities
Speaker 1: that make the health care system work, and when they
Speaker 1: lose them in a in a in a uncontrolled outbreak,
Speaker 1: which is what the Abola was in West Africa for
Speaker 1: you know the first years literally, um then that set
Speaker 1: the country back because it takes you know, many years
Speaker 1: to train you and and expensive also you know to
Speaker 1: train new doctors and nurses. So there you would see uh,
Speaker 1: you know development. I mean they estimate that the West,
Speaker 1: in West Africa, development was set back by a decade.
Speaker 1: So losing a decade of growth in a very poor
Speaker 1: in very poor countries, that's very serious. You know, the
Speaker 1: coping with these events is much more difficult in poor
Speaker 1: countries and in poor communities, so they're the effects you know,
Speaker 1: would be long lasting than in countries that are much
Speaker 1: more robust and Brazilian that you know, when the worst
Speaker 1: is over it you can return to normal hopefully. How
Speaker 1: do you see this playing out in China? Specifically? We
Speaker 1: look with astonishment that the measures that are being implemented
Speaker 1: in China, and it's I'm no expert in China or
Speaker 1: in u or these kinds of measures, and I can
Speaker 1: only hope that it's work. We should all hope that
Speaker 1: it's works. Thank you so much. Good that was really interesting,
Speaker 1: Thank you, thank you for having me here. Thank you
Speaker 1: so much for coming on off of so Joe's Away.
Speaker 1: So I'm just going to talk to myself for a
Speaker 1: couple of minutes, but I just want to say I
Speaker 1: always find that kind of deep dive into bond documentation
Speaker 1: very fascinating, and I find this particular conversation fascinating not
Speaker 1: just because coronavirus is impacting so many people around the
Speaker 1: world at the moment and also global markets, but also
Speaker 1: because these pandemic bonds remind me a little bit of
Speaker 1: E s G investing, which is the other hot topic
Speaker 1: in finance at the moment. Investors buy stuff that's supposed
Speaker 1: to be environmentally friendly or aimed at some sort of
Speaker 1: social good or governance related thing, and too often we're
Speaker 1: not asking the right questions about how these things are
Speaker 1: necessarily structured, who's doing the due diligence on them, who's
Speaker 1: monitoring performance versus pay out. A lot of people just
Speaker 1: seemed to be reaching for the hot new thing that
Speaker 1: happens to come with a you know, cuddly do good label,
Speaker 1: and the potent the pandemic bonds remind me a lot
Speaker 1: of that now. If you want to read more about these,
Speaker 1: my Bloomberg colleagues John Lowerman and Tasso's Vassos also wrote
Speaker 1: a great piece about the pandemic bonds last year, definitely
Speaker 1: worth reading. So this has been another episode of the
Speaker 1: All Thoughts Podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway. You can also follow my
Speaker 1: absentee co host Joe Wisenhal at The Stalwart, and you
Speaker 1: can follow our producer Laura Carlson at Laura M Carlson.
Speaker 1: You can also follow all of Bloomberg podcasts at the
Speaker 1: Twitter handle at podcast. Thanks for listening.