What the Coronavirus Means for Pandemic Bonds

been asked to work from home. And as I'm recording, there's this huge thunderstorm outside, So apologies if you hear in the background, but I gotta say, the entire atmosphere of Hong Kong at the moment feels kind of apocalyptic. This morning, China just reported an extra fifteen thousand coronavirus cases after changing its methodology for diagnosis, and that takes the total cases to more than fifty in who the province alone own the epicenter of the outbreak. Deaths are

now well over a thousand people. That's according to official numbers, and of course there's a lot of doubt surrounding those official numbers. And in between sort of obsessively checking my temperature all week and trying to find masks in Hong Kong, most of them are sold out. There's another thing that I've been obsessing over, and that is the World Bank's catastrophe bonds. Now, these aren't just any catastrophe bonds. CAT bonds are typically linked to things like hurricanes and earthquakes

and other natural disasters. But the ones we're going to be talking about today are a three D twenty million dollar cat bond issue back in that's linked to pandemics. In fact, it's the first pandemic bond ever and it was sold in response to the Ebola outbreak from a few years ago, and the bond basically backs the World Banks Pandemic Emergency Financing Facility, that the thing that is

used to fund biding these kinds of global outbreaks. Now, the idea behind the bonds is that there are a way for investors to bear some of the financial risk of a global pandemic. If an outbreak gets bad enough, then the bonds get triggered and their principal value gets paid into the World Banks account to help fund containment efforts against whatever disease is currently reaking havoc. In the meantime, investors get to earn interest, and I ought to say

it's pretty good interest. The riskiest trench pays about I think over libor, and the least risky trench pays something like seven percent over libor. Now I just mentioned riskiest trench and the least risky trench, and as you can imagine, there are different payout triggers for different parts of the bond, and they come into action at different points in time. And defining a pandemic isn't something that normally comes up

a lot in finance. I think it's worth digging into these bonds to see exactly what those triggers look like, what the structure looks like, looks like, how people in finance think about global pandemics, and also what we can learn about pandemic containment efforts in general. And so today we're going to talk with one of the critics of the bonds, but also someone who has a lot of

experience from an economics perspective with pandemics. Our guest is Olga Jonas of the Harvard Global Health Institute and also a former economist at the World Bank. Olga, thanks so much for coming on, um, thank you very much, very glad to be here. So I guess my first question is how did you get interested in this particular bond issue because I've seen you on Twitter and you tweet quite a lot about it, and of course there aren't that many people out there on social media who are

talking about pandemic bonds. Yeah. Well, I mean the origin it was that I was working. I'm a macro economy but in two thousand and five I was in a central policy department at the World Bank, and it was at that time that the international response to a van influenza and the pandemic threat from avian influenza was launched. And you know, just was a fortunitous coincidence that I was in the department where this this response was managed

for the World Bank. So I got very interested in pandemics and pandemic risk because it's really very much underappreciated and it's not studied very seriously because between episodes of emergency, people forget about this risk and and it's not um

something that they worry about, which is a mistake. And as we went through the response to a vin and pandemic influenza from two thousand five to two thousand ten, you know, it became clear that the world is not ready for a pandemic, that there are just you know, the capacities to prepare and and to prevent such a catastrophic event, you know, are feasible, but they are just

not there in the poorest counties. So we became very interested in sustaining the momentum from the Avian food response into you know, building the capacities to prevent and to be better prepared for the next episode, which will necessarily come, as they say, you know, it's not a matter of if, but when. UM. But unfortunately this was sidelined UM, and you know, it just didn't occur, and that was very disappointing,

UM experience, very frustrating. And then you know, the Abole outbreak in two thousand fourteen was a reminder that poor counties. This was in West Africa where we saw that you know, it devastated the economies and then too many people died in Liberia and cra Leone and Guinea uh And afterwards there was momentum to sort of renew the efforts towards being prepared next time, and instead of focusing on the capacities in the countries, the World Bank went this other route.

But unfortunately it's you know, it was not a priority in the priorities definitely in the countries to be very prepared, and this was very much a response, well, what if there is a pandemic, I mean, how do we get more money kind of response. But not only is that not a lower priority, but it also was shown to be not feasible to design it in a way that it would work. So it's you know, it's a it's it's a sort of an accumulation of sort of errors of judgment and analysis that brought us to where we

are today. So just to back up for one second, so you're talking about, you know, the preferred way of dealing with a pandemic would be to have a domestic health care system that is capable of responding on its own, but there was a preference for figuring out some way to get additional money funneled into a particular country or against a particular series of countries if they're hit by the pandemic. So how exactly are these bonds supposed to work?

How does the money get to the World Bank? Well, it's supposed to work the way a cat bond works, which you know there are parametric triggers, but it proved to be very challenging to define the triggers because it's very difficult to anticipate how an epidemic. You know, when it starts, it's an outbreak, and then it becomes an epidemic. And the idea is that you have to inter being as soon as possible at the beginning to prevent the spread, right.

But but that's very difficult to anticipate what it will look like, and that's why in designing it, they shows triggers that are much later. There is in fact a condition that it has to be at least twelve weeks after the beginning of the outbreak before anything can be triggered, as well as the number of deaths, you know, the high number of deaths and the growing rate of the outbreak,

So that means that it's triggered much too late. But if it was triggered earlier, then the price of the insurance would be much higher, right, because there's just so much uncertainty in the modeling, And much of the uncertainty in the modeling is due to the lack of data on these kinds of events, and the lack of data is due to the lack of public health systems in developing countries, which is what is needed to invest in, not health care systems. You know, it's not all health care.

It's not hospitals and clinics and all that. It's just the basic it's called core public health functions, which is the capacity to detect, to diagnose, and to respond to an now the break, and that's not very expensive. It's in fact highly affordable compared to the benefits, and that

hasn't been done. That's that's what has been sideline, and you need that to do to do modeling that would actually enable insurance maybe in thirty years from now, when the health systems are in place to generate the data that you need to do the modeling. So there seems to be attention here because obviously, if you're fighting a pandemic,

you want this extra money as soon as possible. But the terms of the bonds make it difficult for them to pay out because a you have this sort of twelve week limit that you just mentioned, and you also have to have deaths that take place in other countries outside of the original outbreak country. You mentioned that data is quite hard to get um when there is a global pandemic. So who's who's the arbiter of when these bonds actually pay out. How do they verify that the

trigger has actually been met? Well, there is actual verification of the triggers is spelled doubt in the prospectives of the for the bonds, which is three eighty six pages long, and there is a verification agent which is uh, you know, af firm. It's a commercial contract between the World Bank and the and the verification agent, and they are going to ascertain whether all the triggers have been met. But the triggers are triggers have been described as a maze

of confusion. So you know, this is not a trivial exercise to verify ideas triggers because it's it's really quite complex. I mean, it takes three eight six pages to set out the terms of the bonds. So when the verification agent notifies the World Bank that, you know, the triggers have been met, then the World Bank would get the money from the bond bonds because it's holding a means holding that money, right right, what's the maximum payout that

the World Bank could get? Well, that's that's the other issue that's very disappointing in this whole experience is that for coronavirus um, when you look at it. The first payoffs if it happens, right, I mean there's no certainty. No, I mean there's no way of telling, at least from

where I said, whether it will happen. It will be hundred and thirty one million dollars and the maximum payout is one hundred and nineties six million dollars, and that will have to be divided among the seventy six poorest countries. It's about eight cents per capita because there are one point more than one point six billion people in the

poorest countries that are eligible to get the proceeds. So it's eight cents per capita, which you know, and when you compare it to what China is already spending on its response, right, which we have all seen on UM the dramatic images of hospitals being built in one weekend and post cities under quarantine, and they have announced that they have already allocated ten billion dollars for their response,

so you can see that. You know, if the poorest countries in the world with more a bigger population than China to together, they will get only um, you know, a fraction of what China is all is spending, so it will not make much difference. It will be too little, too late. Do you think the bonds will trigger for the coronavirus out I hope they do, you know, I mean,

I really hope they do. Because the tragic one of the sort of tragic aspects of this is that in fact the payment for the cost of the bonds that needs the premiums and the interest and the fees that were you know, associated with this pretty complicated transaction, that those add up to one and fifteen million dollars, and those funds actually came from funds that were intended for

the poorest countries. They came from IDA, which is the soft clone window the World Bank, which is, you know, money that donors give for the World Bank to finance productive projects in the poorest countries. So that was fifty million from IDA. Then fifty million was donated by Japan. But I'm sure you know, the Japanese government intended that their donation of fifty million benefits the developing countries, benefits you know, the poorest countries, protect them from pandemics. And

and then fifteen million was donated by Germany. So also you know, taxpayers, taxpayers in Germany, taxpayers in Japan. So altogether one and fifteen million has been paid for premiums when interests I mean for the interest and for the penniums and for the fees to beneficiaries or you know, two recipients who are not for who are in high

income countries. I mean, these are investors who of course they invested their funds and they are you know, at risk of losing some of this money because of the triggers. But you know, that's a very high return, as you mentioned, it's still even over libel or seven percent over libor for the other branch. Um, those are very generous returns

in today's market conditions. And um, you know then I think you mentioned when in your introduction that the idea was that the investors or the private markets would share some of the risks of the pandemic and you know, thereby thereby contribute. You know, in fact, when the pandemic wortions more than it is already and the anticipate that it will worsen, the markets will you know, decline, prices of assets fall, so investors are already going to be

losing a lot of money just because there is a pandemic. Right, So these were pitched as sort of something that should kind of be uncorrelated with the broader market, But in fact whenever they trigger, if they actually trigger, it would probably be because something quite serious was happening, and therefore markets around the world would be falling anyway, exactly, So

investors sort of get a double whammy. So for the investors, it's not that I don't see how there could be much of a diversification than a faith because these bonds are going to move with the market from the prices, right, So who are the investors who who bought these Who who's a typical buyer of this kind of bond? Well, I think I don't actually know. Um. I think if you know, they were just investors who buy cat bonds, who you want to see them in their portfolios as

an element. Um I think there are some pension funds who bought it. But it's definitely the high returns have not been earned by developing countries, you know, I'm quite certain it's all high income investors. Do you think there's any way to structure this kind of bond in a way that would be satisfying or attractive for investors but also ultimately fulfill the purpose of a pandemic bond for public health, which presumably is getting extra money to the

World Bank as soon as possible. No, well, number one, the World Bank does not need the money to respond to pandemics. You know, the World Bank is not a budget constraint entity. It's a bank. And IDA, the Fund for the Poorest Countries, is the largest multila all fund public fund to support development in poor countries, which includes, for the last fifty years, responding to emergencies. Because emergencies, you know, occur um a matter of I mean often, right,

And IIDA has very you know, ample liquid assets. It has reserves, it lends, it makes new loans worth now twenty seven billion dollars every year, right, So, and the allocations are done on a three year basis. So now it's allocating eighty two billion dollars for every three years. It's a rolling process. Right. So there's you know, you cannot nobody can say that the World Bank needs more money in order to respond to outbreaks. The World Bank does have the money. And that's this that's the very

purpose of the World Bank. I mean, that's why it was set up. It was set up to support countries in there. You know, for their priority needs. As circumstances change, and if there is a outbreak of a bola or coronavirus, the money is not the issue. The preparedness of the World Bank to respond to you know, delivered the financing on the ground, and the preparedness of the country too, you know, implement the activities that are necessary to control

the outbreak. But money is not has never been the issue. I mean, if you have eighty two billion dollars in the fund, you do not issue bonds that library plus eleven to obtain a hundred and ninety six million in case there is a coronavirus. Right, It's just I mean, the World Bank has ample reserves to deal without outbreaks in either countries. So this was more of a sort of attention getting initiative, you know, to have an innovation, to try to innovate in this space. But it was

not needed and it did not work. So I want to broaden out the conversation a little bit and go back to some of your experience as an economist dealing with other epidemics such as avian flew back in the early two thousand's. Um, what what lessons did you learn as an economist dealing with those sorts of epidemics, because I must admit I don't really know exactly what the role is of an economist at the World Bank in dealing with those kind of outbreaks. What did you actually

do and what did you learned? Well, you know, what's astonishing is that how underappreciated the economics of epidemics where or still are, because there there's very little realization that if you act early and if you are prepared to stop the outbreak when it's just a few cases, you know, before it spreads, then in fact you are avoiding a

huge cost later. And the huge cost is due to the exponentials threat, you know, the exponential growth that can happen with these diseases because like two people give it to four people, to you know, sixteen people, et cetera.

It's you know, it's a very rapid progression of growth, and that's not understood by the by the sort of bureaucratic processes that we have in place to respond two disasters, you know, because usually it's a disaster that occurs and then there is an estimate of the costs of rebuilding, like in a hurricane or or in an earthquake, and then there are activities to rebuild, but in this case

you are averting something that hasn't happened yet. Sort of there's an overreaction in reacting, but at the same time there's the lack of appreciation of how much money you saved by reacting early and being prepared. So that's why there's this repetition of you know, panic and then it's forgotten because in the health sector, there there are so many unmechands that people's attention shifts somewhere else. There's always

some other priority. It's that comes up and catches attention, and then you know that accounts for the high costs of responding the next time. If the bank is not prepared, the countries are not prepared, it's very difficult. And we are seeing it again with coronavirus because basically from two thousand fifteen, which was the end of the end of the last epidemic that was sort of a major epidemic in West Africa, you know, not not much has happened

to improve preparedness acause the worst countries. M HM. So you mentioned that after other disasters like a hurricane or an earthquake, there's sort of building activity that starts up immediately afterwards, and I would assume that that maybe helped stimulate the economy in one way or another. In your experience or in your research after a pandemic, what sort of economic impact does that have in the long term?

Does the recovery, the economic recovery after a pandemic look different to the economic recovery after an earthquake or a hurricane.

I mean, it's sort of a high level answers know that it's you know, macro economically set tempre a shock that bosses as soon as you know, the disruptions um of travel and the raid and and you know supply chains to Gemen, that comes to an end and things return to normal, and there's a um there's no permanent effect, however, in when this happens in poor, very poor countries, like what happened in West Africa and in thousands fourteen to sixteen, the Ebola outbreak had a very severe effect on the

health care system. A large number of doctors and nurses died.

And when you think of that in the context of a poor country that does not have enough doctors and nurses, and you know, these kinds of you know, human capacities that make the health care system work, and when they lose them in a in a in a uncontrolled outbreak, which is what the Abola was in West Africa for you know the first years literally, um then that set the country back because it takes you know, many years to train you and and expensive also you know to

train new doctors and nurses. So there you would see uh, you know development. I mean they estimate that the West, in West Africa, development was set back by a decade. So losing a decade of growth in a very poor

in very poor countries, that's very serious. You know, the coping with these events is much more difficult in poor countries and in poor communities, so they're the effects you know, would be long lasting than in countries that are much more robust and Brazilian that you know, when the worst is over it you can return to normal hopefully. How

do you see this playing out in China? Specifically? We look with astonishment that the measures that are being implemented in China, and it's I'm no expert in China or in u or these kinds of measures, and I can only hope that it's work. We should all hope that it's works. Thank you so much. Good that was really interesting, Thank you, thank you for having me here. Thank you so much for coming on off of so Joe's Away.

So I'm just going to talk to myself for a couple of minutes, but I just want to say I always find that kind of deep dive into bond documentation very fascinating, and I find this particular conversation fascinating not just because coronavirus is impacting so many people around the world at the moment and also global markets, but also because these pandemic bonds remind me a little bit of E s G investing, which is the other hot topic

in finance at the moment. Investors buy stuff that's supposed to be environmentally friendly or aimed at some sort of social good or governance related thing, and too often we're not asking the right questions about how these things are necessarily structured, who's doing the due diligence on them, who's

monitoring performance versus pay out. A lot of people just seemed to be reaching for the hot new thing that happens to come with a you know, cuddly do good label, and the potent the pandemic bonds remind me a lot of that now. If you want to read more about these, my Bloomberg colleagues John Lowerman and Tasso's Vassos also wrote a great piece about the pandemic bonds last year, definitely worth reading. So this has been another episode of the

All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. You can also follow my absentee co host Joe Wisenhal at The Stalwart, and you can follow our producer Laura Carlson at Laura M Carlson. You can also follow all of Bloomberg podcasts at the Twitter handle at podcast. Thanks for listening.