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Podcast Summary
Principal Asset Management offers local insights and global expertise in real estate investment classes amid pandemic: Principal Asset Management's pandemic catastrophe bonds offer investors attractive returns while contributing to pandemic containment efforts, with riskiest tranche paying 11% and least risky offering 7% over LIBOR.
Principal Asset Management, as a real estate manager, leverages a 360-degree perspective to deliver local insights and global expertise across various investment classes, including public and private equity and debt. Amid the ongoing coronavirus outbreak, the World Bank's pandemic catastrophe bonds have emerged as an intriguing investment opportunity. These bonds, issued in 2017, are linked to pandemics and provide a way for investors to bear some financial risk in exchange for earning interest. The riskiest tranche pays around 11%, while the least risky tranche offers around 7% over LIBOR. The bonds are designed to fund containment efforts against pandemics and have been triggered in response to the current outbreak. Despite the uncertainty and risks associated with pandemics, these bonds offer investors an opportunity to earn attractive returns while contributing to a crucial cause. It's important to note that investing always comes with risks, and potential losses are a possibility. For more information, visit principalam.com and americanexpress.com/businessgoldcard.
Lack of Effectiveness of Pandemic Bonds in Addressing Root Causes: Criticism towards pandemic bonds for not addressing root causes of pandemic preparedness and response. Focus should be on building capacities in countries instead.
The pandemic bonds, which are financial instruments designed to provide funds during public health crises, have faced criticism due to their ineffectiveness in addressing the root causes of pandemic preparedness and response. Olga Jonas, a macroeconomist and former economist at the World Bank, shares her personal experience with the international response to avian influenza in 2005 and the realization that the world was not ready for a pandemic. Despite the disappointing experience and the devastating impact of the Ebola outbreak in 2014, efforts to sustain the momentum for building capacities in countries to prevent and prepare for the next pandemic were sidelined. Instead, the focus shifted towards designing a financial response in case of a pandemic. However, this approach was shown to be not feasible and not a priority, leading to a series of errors in judgment and analysis that brought us to where we are today. Jonas emphasizes the importance of focusing on building capacities in countries to prevent and prepare for pandemics, rather than relying on financial instruments as the sole solution.
Pandemic Bonds and Their Challenges: Despite the need for immediate financial aid during pandemics, implementing pandemic bonds faces challenges due to the difficulty of defining early triggers. Current designs include a significant delay and high number of deaths as triggers, making them less effective for intervention.
During a pandemic, having a robust domestic healthcare system is crucial for effective response. However, there has been a preference for providing additional financial aid to countries affected by the pandemic. Pandemic bonds were proposed as a solution, but their implementation faces challenges due to the difficulty of defining triggers for an epidemic. These bonds were designed to work similarly to cat bonds, with parametric triggers, but the uncertainty surrounding the timing and nature of an epidemic makes it challenging to define early triggers. The current design includes a 12-week delay after the outbreak's start and a high number of deaths as triggers, which is too late for effective intervention. The lack of data on these events in developing countries, where core public health functions are underinvested, further complicates the situation. The tension lies in the fact that fighting a pandemic requires immediate financial aid, but the terms of the bonds make it difficult for payouts. Verification of triggers is the responsibility of a verification agent and is outlined in the bond's prospectus.
Verifying coronavirus triggers in complex contracts: Despite $327M potential payout to 76 poorest countries, $115M in bond premiums, interest, and fees went to investors, raising concerns about fairness and effectiveness.
The process of verifying triggers in a complex commercial contract between the World Bank and verification agents regarding coronavirus-linked bonds is a challenging task due to its complexity and uncertainty. The potential payout, estimated at $131 million for the first instance and $196 million maximum, would be divided among 76 poorest countries, equating to approximately 8¢ per capita. This amount pales in comparison to China's $10 billion response to the crisis. Unfortunately, the funds used for the bond premiums, interest, and fees amounted to $115 million, which originally came from donations intended for productive projects in the poorest countries through the IDA, Japan, and Germany. Instead, these funds have been paid to investors in high-income countries. Despite the hope that the triggers will be met, the outcome may not significantly benefit the poorest countries, raising concerns about the effectiveness and fairness of the transaction.
Pandemic bonds may not effectively diversify: Pandemic bonds, intended to be uncorrelated, primarily attract high income investors and don't effectively diversify, despite the World Bank not needing additional funds during pandemics
Pandemic bonds, which offer high returns to investors as a form of pandemic risk sharing, may not provide effective diversification due to their correlation with broader market declines during times of crisis. These bonds, which were intended to be uncorrelated and provide extra funding for the World Bank during pandemics, have instead primarily attracted high income investors. However, it's important to note that the World Bank does not actually need additional funds to respond to pandemics, as it is a bank with ample liquid assets and the ability to make new loans worth billions every year.
Early action and preparation save costs during epidemics: Acting early and being prepared during epidemics can prevent exponential growth and save significant long-term costs, but the focus on disaster response often overlooks this importance.
During epidemics, acting early and being prepared can save significant costs in the long run, despite the lack of immediate financial need. Economists at the World Bank, like the speaker, have recognized this underappreciated aspect of epidemics. The exponential growth of diseases can lead to substantial expenses if left unchecked. However, the bureaucratic processes for disaster response often focus on rebuilding after an event rather than preventing it. The importance of early action and preparation is often overlooked due to the shifting attention towards other needs and the high costs of responding the next time if proper measures aren't taken. The speaker emphasized that since the end of the last major epidemic in West Africa in 2015, not much progress has been made to improve preparedness across the poorest countries, leading to the current challenges with the coronavirus.
Pandemics can set poor countries back a decade due to loss of essential human resources: Pandemics can have long-term consequences on development in poor countries due to loss of healthcare workers, while robust healthcare systems help richer nations recover more quickly.
While the economic impact of a pandemic may be temporary on a macro level, the consequences can be long-lasting in poor countries due to the loss of essential human resources, such as doctors and nurses. For instance, the Ebola outbreak in West Africa set the region's development back by a decade. In contrast, countries with robust healthcare systems and resources can recover more quickly. The ongoing situation in China, with its strict measures to contain the coronavirus, remains to be seen. This conversation also brought to mind the topic of ESG investing, where investors put money into environmentally friendly or socially responsible projects, but it's crucial to ask questions about the structure, due diligence, and monitoring of these investments.
Understanding the hype behind pandemic bonds: While pandemic bonds gained popularity due to their 'do good' label, it's crucial to look beyond the label and assess the underlying investment.
People are often drawn to the latest trendy labels, much like the pandemic bonds. These bonds gained popularity due to their "cuddly do good" label, but it's important to look beyond the label and understand the underlying investment. For more in-depth analysis, check out the article written by John Lauerman and Tasos Vasos for Bloomberg. On a different note, we're excited to announce a new podcast from our Bloomberg colleagues, Matt Levine and Katie Greifeld. They'll be bringing their popular Money Stuff newsletter to life every Friday, diving into Wall Street finance and other topics. Don't miss out, you can listen to Money Stuff on Apple Podcasts, Spotify, or wherever you get your podcasts. That's all for now on Odd Lots. I'm Tracy Alloway, follow me on Twitter @TracyAlloway. And this is Joe Weisenthal, @TheStalwart. Our producer is Laura Carlson @LauraMCarlson. Thanks for listening! And remember, take your business further with the American Express Business Gold Card, featuring flexible spending capacity and up to $395 in annual statement credits on select business merchants. Learn more at americanexpress.com/businessgoldcard. Terms apply.