Financial capitalism to the rescue of the most vulnerable ...

ValérieL’Heureux Centred’étudessurl’intégrationetlamondialisation

Financialcapitalismtotherescueofthemostvulnerablenations?TheWorldBank'sPandem-icBondsNotederechercheduCEIM,ValérieL’Heureux,15novembre2020

Abstract

Createdtoprovidefundingifneededtothemostimpoverishednationssotheycancontainfutureoutbreaks, theWorldBanklaunchedthePandemicBondsin2017.After an overview of catastrophe bonds, this paper describes the genesis, basicfeatures,and investors'profileof thoseBonds. Iarguethatthosebondswerede-signedwithaverypeculiar financial structure.Lookingat the innercircleofpri-vate organizations behind the architecture, promotion, and arbitration of that"project," the decisional process's opacity and the various roles played by someactorsraisemanyquestions. Iwilldemonstrate thatpandemicbondsarenotde-signedtopayoutintheeventofglobaldiseaseoutbreaksbuttoensurereturnsforinvestors.

Résumé

Créées pour fournir si nécessaire un financement aux pays les plus pauvres afinqu’ilspuissentprévenirdefuturesépidémies,lesobligationspandémiquesontétélancéesparlaBanquemondialeen2017.Aprèsunbrefsurvoldesobligationsca-tastrophes,cettenotederecherchedécriralagenèsedesobligationspandémiques,leursprincipalescaractéristiqueset leprofildeses investisseurs. Jesoutiensquecesobligationsont été conçuesavecune structure financière inhabituelle.En re-gardant lecercle restreintd’organisations privées derrière l’architecture, la pro-motionetl’arbitragedece«projet»,l’opacitéduprocessusdécisionneletlamulti-tudede rôles jouésparquelquesacteurs laissentperplexe.Je ferai ladémonstra-tion que ces obligations ont été constituées non pas afin d’aider à contenir desépidémiesdanslespayslesmoinsfavorisés,maisplutôtafind’assurerunprofitàsesinvestisseurs.

Summary

Introduction..............................................2

Catastrophebonds..................................2

ThegenesisofthePandemicBonds............................................................4

PandemicBondsunderScrutiny.......................................................8

Currentsituation..................................10

Conclusion...............................................10

References...............................................13

TheWorldBank'sPandemicBonds ValérieL’Heureux 2

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IntroductionOnMarch3rd,2020,theWorldBanklaunchedaUSD$12billionresponsepackagetohelpdevelopingnationsandtheprivatesectordealwiththeCOVID-19"epidemic."ByannouncinganadditionalUSD$2billioninex-trahelptwoweekslater,thediscoursehaschanged,andtheword"pandemic1"wasthenused(WorldBank,2020b). Defining the COVID-19 outbreak as an "epidemic" rather than a pandemic for so long (untilmid-March)wasnot coincidentalandhaddireconsequencesoutside thesemanticsdebate.The financial sectorwashopingtouseloopholestoavoid,amongotherthings,triggeringthepay-outofthe'pandemicbonds'totheWorldBank,whichhassubsequentlyledtohundredsofmillionsofdollarsinaidbeingwithheldtolow-incomecountries.Atfirstglance,thosepandemicsbondsseemliketheperfectillustrationofinvestorsprofit-ingfromsocialills.

ThispaperexploresthecreationofthoseWorldBank'spandemicbondsasaformofcatastrophebondanddelvesintoitsinvestorsaswellasarchitects,whoconstitutemajoractorsinawiderprocessoffinancializa-tion.IntroducedbytheWorldBankin2017,pandemicbondswerecreatedtobringfundsrapidlytocountriesin need to prevent and contain a pandemic. This paperwill showhow the bonds represent a distinctivelyneoliberalandfinancializedwayofrespondingtocrises,seekingtogeneratemarket-basedformsofsupportinthecontextofcrisisratherthandrawingonstatefunding.Iwilldelineatethefinancialstructure,conditionsforthepayout,andpracticalimplicationsofthebonds,demonstratinghowthisprocessisfaultybylookingatthecurrentpandemic.Iarguethatcatastrophebondsingeneralandpandemicbondsmorespecificallymightbeconsidered"innovative",butrepresentmostlydefectiveanddeceptiveattemptsby(re)insurerstospreadasmuchaspossiblesomeofthe"news"risks(likeclimatechange,terrorism,pandemics),andforinvestorstodiversifytheircapitalaccumulationsurplusinuncorrelatedfinancialvehicles.Iwilldemonstratethatpan-demicbondsarenotdesignedtopayout intheeventofglobaldiseaseoutbreaksbuttoensurereturnsforinvestors.

CatastrophebondsTheWorld Bank's pandemic bonds are part of a family of financial products known as catastrophe bonds(alsocalled"catbonds"),themselvespartofthebroadercategoryofinsurance-linkedsecurities(ILS)2.Devel-opedbyinsuranceandreinsurancecorporations3,catbondscanbedefinedas"afinancialmechanismmeantto insureagainstpossiblenaturaldisasters"(Keucheyan,2018,p.486)with"highmortality"(Ibid.,p.491).However, protection against natural disasters is not a new phenomenon per se, but new risks are getting

1Simplydefinedasanepidemicintwoormoreregionsworldwide,thedecisiontodeclareapandemic“hasnothingtodowithchanges to thecharacteristicsofadiseasebut is insteadassociatedwithconcernsover itsgeographicspread.Ac-cordingtotheWorldHealthOrganization,apandemicisdeclaredwhenanewdiseaseforwhichpeopledonothaveim-munityspreadsaroundtheworldbeyondexpectations.” “Ultimately, theWHOgets the finalsay.There isnothreshold,suchasacertainnumberofdeathsorinfections,ornumberofcountriesaffected,thatneedstobemet.”(Davey,2020)2ILSarealsoknownasalternativerisktransferandcoverothertypesofriskslie“credit,biotech,civilliabilityandsoon”(Keucheyan,2018,p.491).3Thereinsuranceindustrywasoneofthefirsttogetglobal:thetwomostprominentplayersrightnow,MunichReandSwissRe,werefoundedrespectivelyin1880and1863(Keucheyan,2018,p.487).Bothreinsurersaredeeplyimplicatedinthedesignanddevelopmentofthepandemicbonds,whichwillbediscussedlaterinthispaper.AgoodoverviewofthereinsurancehistoryandecosystemisprovidedinthebookMakingaMarketforActsofGod:ThePracticeofRiskTradingintheGlobalReinsuranceIndustry(Jarzabkowski,BednarekandSpee,2015).


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muchcoverage,likeglobalterrorism,climatechange,pandemics4,etc.Whatmakescatbondsuniqueiswhatitlinkstogether:"phenomenaasdiverseasearthquakes,hurricanesandinfluenzapandemicsareepistemo-logicallyconstitutedasrisksformingpartofthesameassetclass,thecharacteristicsofwhichtroubletypicalconceptualdichotomiesbetweenassetsand liabilities, and inbetweengeophysicalnatureandhuman life".(Johnson,2013,p.30)

Rapid changes like privatization and financialization have increasingly affected this sector since the mid-1990s5.Furthermore,catbondshavebeenincreasinglyperceivedasameansoffurtheringaccumulationforinvestors.Indeed,sincetheiremergenceattheendofthelastcentury,theyhaveprovidedadistinctivewayofresolvingwhatHarvey (2010) describes as the "capital surplus absorptionproblem."As capitalists alwayscreatesurplus(profit),theycompetetofind"newprofitableoutlets"toreinvestin(Harvey,2010,p.26).Thisisthecasehere.Asinvestorsfacedlimitedopportunitiestogeneratereturns,especiallyafterthe2008crisis,theyhaveturnedtocatbondsasaplaceto invest theircapitalsafely.Bycreatingamarket tospeculateonfuturecatastrophes(fromtradeonpollutionrights,toweatherandtoeveninfectiousdiseasesasinthecasethatinterestsushere),catbondshavecreatedaspaceforinvestorsto"investinderivativesofassetvaluesand ultimately even in derivatives of insurance contracts on derivatives of asset values." (p. 21). This hasprovidedameansofexpandinginsurancetoincludedomainsthatwerepreviouslythoughttobeuninsurable(Jaffee&Russell,1997).AsDoyleandEricson(2010)note:"Insuranceliteraturestatesthattwoofthethingsthatmakerisksuninsurableareiftherisksaretoolargeorthereisinsufficientactuarialdata."(p.136)Thosecontradictionsperfectlyapplytocatastrophebonds.

Forthosepromotingthem,catbondsareseenassolutionstotherecurringissuesinthissectorofthecyclicalnatureofdisastersofallkindsandtherealissueofilliquidity."Insurersneedthisextralayerofprotectionforthemselves,becausecatastrophestypicallyhitaregionveryabruptly.Thismeansthat(…)largeamountsofmoneyneedtobedisbursedsuddenly,threateningtheinsurerwithinsolvency."(Forgues,Etzion&Kypraios,2020).

Inherarticleonsecuritized6catastropheriskanditsimplicationsonclimatechange,Johnson(2014)givesacomprehensivecontextualizationofthisinnovation:

Intraditionalcatastropheinsurancerelationships,thevulnerabilitiesoffixedcapitaldrivearevenuestreamfromassetownerstotheguarantorsoffinancialcompensation(typicallyinsurersandreinsurers).Thehighannualvariabilityandunpredictabilityof insurers'andreinsurers'profitsandlossesandthecyclicityof in-surancepricinghavetypicallydiscouragedtraditionalequityinvestorsfrominvestinginthesefirms'shares.Yetastheprovisionofcatastropheinsurancehasbeensecuritized,theseplace-boundvulnerabilitiesareren-deredintoanexploitable,diversifyingassetclassforfinancialcapital.(p.157)

Howdoesitworkforinvestors?Theyareofferedbyreinsurersbonds,withapotentiallyhighreturnonin-vestment ifnocatastrophiceventcoveredexplicitlybythebondandsurpassingthepredeterminedthresh-old/triggerhappened.Inthatevent,theywilllose(partiallyortotally)theirinvestment.Ifnothinghappened,

4SwissRewasthefirsttoissueapandemic/extrememortalityeventbond(nottheoneweareanalyzinginthispaper,butthemore general family) back in 2003: since then, almost 30different cat bondswith a pandemic element havebeenlaunched. None have been triggered and forced to pay out until the current Covid-19 pandemic (Forgues, Etzion &Kypraios,2020).5 “At that time,simultaneouswavesofderegulationandmarketconsolidation,coupledwithgrowing financial lossestonatural catastrophes, paved theway for an array of new instrumentswithwhich to hedge and speculate on the risksposedbyweatherandothernaturalhazards.”(Johnson,2014,p.156)6Securitization,ingeneral,isatypeoffinancialinnovation“spreadtheriskaroundandevencreatedtheillusionthatriskhaddisappeared.”(Harvey,2010,p.17)


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theycouldcollectthequarterlypaymentsoftheirinterestsandtheirprincipal,inthatcase,aftertheprede-terminedmaturationdateofthebond.

Thefinancialcrisisof20087,andthederegulationthatfollowed,onlystrengthenedtheinterestofmanyinsti-tutionalinvestorsin"catbonds."AsHarveyputsit,afinancialcrisislikethatonetendstoleadto"reconfigu-rations, newmodels of development, new spheres of investment" (2010, p. 12). In the samevein, Johnsonarguesthat"thedemandforcatbondshascontinuedtogrowbecauseofthepurposive,selective,andscalablerelationshipsthattheseinstrumentsenablewithfixedcapital."(2014,p.173)Investorscanpickandchoosetheir investments that have been globalized following multiple financial entanglements and disentangle-ments,thusallowingthesecuritizationprocessofthosebonds.

It is also important tomention that cat bondswere attractive post-2008 as an investment object that ap-peareduncorrelatedtorisksonthestockmarket.Evenifthemarketcrashed,itseemedlikecatbondswouldretain theirvalue.Diversificationwas, therefore,oneof themainobjectivesofmany investors inusing thisinnovativefinancialtoolforcapitalaccumulation.AsKeucheyan(2018)exposesinhisarticle,thisissuppos-edlyadefiningcharacteristicofcatastrophebonds:"(…)thechanceofacatbondbeingtriggeredislow;ithasbeenestimatedataround1–2percent(...).Catbondsdothereforeplayaroleininvestors'strategiesofdiver-sifyingtheirportfolios."(p.490)

HavingsituatedthebroadertrendofcatastrophebondsfromwhichtheWorldBank'sPandemicBondsinitia-tiveemergesfrom,thefollowingsectionwillexplainthecreationofthosebonds.

ThegenesisofthePandemicBonds

CreationDrawingfromthegrowingpopularityofcatbondsoverthepastdecade,theWorldBanklaunchedpandemicbonds in June2017as specialized funds to finance thePandemicEmergencyFinancingFacility (PEF).Thisfacilitywasfoundedtheyearbefore,intheeventofanofficialWorldHealthOrganization(WHO)-recognizedpandemic.Initiatedafterthe2014-5Ebolaoutbreak,thePEFprovidesfinancingthroughtwowindows:acashwindow8 and an insurancewindow. The insurancewindow "(...)works like any other insurance: it pays apremiumtobuyprotectionagainstaworst-casescenarioofacross-borderpandemic.Theinsurancewindowhaspurchased$425millionaggregateinsuranceatanannualizedpremiumcostof$36.2million(orequiva-lent to8.5%)"(WorldBank,2019).Graphic1showshowit issupposedtoworkstepbystepthroughbothwindows,highlightingthatthecashwindowismobilizedonlywheninsurancecriteriaarenotsatisfied.

7“Therelativesuccessofthecatastrophebondmarketincomparisontootherequitiesisoneoftheprimaryreasonswhythe ILSmarketcontinues toattract interest from“realmoney”(i.e.,unleveraged) funds,suchaspensionandsovereignwealthfunds.Nevertheless,theILSmarketalsodemonstratestheimpossibilityofanentirelyzerobetafinancialproduct.SomecorrelationwiththewidermarketisunavoidableduebothtoILS’spositionasoneofmanyalternativeassetclassesthatshareacommoninfrastructure,andtothemarket’sshiftingreturnsbasedoninterestratesand(re)insurers’costofcapital.”(Johnson,2014,p.174)ThisstrengthenstheargumentofhypercorrelationdevelopedbyKeucheyan(2018)andothersthatwewilldiscussthoroughlylaterinthispaper.8Fundingfromthiswindowiscomingfromamoreconventionaldonor-fundedtrustfundandisoperationalsince2018.Untilnow,onlythiscashwindowhasbeenusedtohelpDRCfightEbolaforatotalofUS$61.4million(Cheng,2020).


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Graphic1:HowthePandemicEmergencyFinancingFacility(PEF)Works

Source: https://www.worldbank.org/en/topic/pandemics/brief/pandemic-emergency-facility-frequently-asked-questions

Theiroversubscriptiontoalevelof200%provesthepandemicsbonds'popularityamonginvestors.Thehighreturnoninvestmentcouldbeanexplanatoryfactor(seethefollowingsection).Asstatedearlier,acombina-tionof$425millionofbondsandderivativesrepresentedtherisktransferredtothemarketintheprocess:ClassA,lessrisky,raised$225millionatanannualizedinterestrateof6.5%.ClassB,ariskierbond,raised$95millionatanannualizedinterestrateof11.1%,andanadditional$105millioninswapderivativeswereaddedto theprocess9.Thescheduledmaturitydate topay for thebondsalongside thosegenerous interestandpremiumpaymentswassettoJuly15th,2020,ifnopandemicwouldhappenbetweenJuly7th,2017andthisdate.Ifnot,investorswouldlose"partoralloftheirinvestmentinthebondifanepidemiceventtriggerspay-outtoeligiblecountriescoveredunderthePEF"(WorldBank,2017)10.ForClassA,tobemoreprecise,theycanloseasmuchas16.7%.ForClassB,itiseverythingthattheyinvested(Gross,2020a;Vossos,2020).

Anotherexcitingbitof information regarding this initiative's inception is aboutwhopaid tobackup thosebonds.The topdonorcountrieswereGermany, Japan,andAustralia,which initiallygavearoundUSD$181million (Cheng,2020;Tan,2020;Gross,2020a).Togetherwith theWorldBank,TokyoandBerlinpaycou-pons(theannualinterestpayment)totheinvestors(Brim&Wenham,2019).Thenextsectionwilldelveintotheinvestmentsideofthisproject.

9Manynewspaperarticlesonthis topicdon’t includethederivativesand focusonthebonds,but theyshouldbegivenmoreconsiderableattentionasitwasthemostinnovativeelementofthisnewinitiativeoftheWorldBank.Ahypothesisfor thissilencecouldbe that those financialproducts'extremelyopaqueandcomplexnaturemade itharder todoanyfollow-up.10Table1(seeannex1),partoftheWorldBankpressreleasetopromotethelaunch,givesanacuteoverview.


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InvestorsLookingatthedistributionof investorsbytypeandlocation,wedenoteahighlevelofhomogeneityamongthem.Forthelatter,thevastmajorityofthebondsbelongtoEuropeaninvestors(72%ofClassAand83%ofClassB),withinvestorsfromtheUnitedStatesowningmostoftheremainingbondsinbothcategories(28%ofClassAand15%ofClassB).Regardingthetypesofinvestors,thecompositionpresentsamoresignificantvariationdependingontheclass11:Inthecaseofthelessriskybonds,around62%belongtodedicatedcatas-trophebondinvestors,21%toassetmanagers,and14%topensionfunds.Regardingtheriskierbonds,pen-sionfundsaretheprimarytypeofinvestors12(42%),followedbydedicatedcatastrophebondinvestors(35%)andassetmanagers(16%)(WorldBank,2017).Amongthoseinvestors,namesthathavebeenconfirmedareBaillieGifford(UK-basedinvestmentmanagementfirm),Amundi(France-basedassetmanagementcom-pany,thelargestinEurope),Oppenheimer(US-basedinvestmentbankandfinancialservicescompany),andPlenumInvestments(Swiss-basedassetmanagementboutiquededicatedonlytoinsurance-linkedsecurities(ILS))(Cheng,2020;Tan,2020).

Regardingwhichmotivations liebehind those investments,highprofitsmightbeoneof them. "Theannualreturnsforaninvestorcanrangefrom5to15percent"(Keucheyan,2018,p.491).BrinandWenhampub-lishedlastyearapaperhighlightingthatthepandemicbondshadalreadyyielded$115millioninreturntoinvestorswhilegrantingonlyabitover$60millionviathe"cashwindow"mechanism.Theobjectiveofport-folio's diversification was furthermore directly mentioned in a quote from one of the architects of thosebonds, Peter Hearn, President and CEO of GC Securities, as reported in the press release celebrating thelaunch. "This facilitywill enhance funding for emergency responseandgive ILS investors and (re)insurersgreateraccesstoanon-correlatingclassofrisk"(WorldBank,2017).Thus,theyshouldbeattractivebecausetheyshouldactfundamentallydifferentlythanthefinancialmarkets.Nowthatwehavedescribedthegenesisofbondsaswellastheirinvestors,wewillanalyzewhatisoutoftheordinarywiththisinitiative.

AnunusualfinancialstructureWeshouldstressthattheWorldBank,claimingtheneedtoattractabroaderrangeofinvestors,decidedtoproceedwithanunusualstructureforthebonds.Thisstructureisdeeplyrootedinthecurrentfinancializa-tionprocess,includingtheover-the-counterderivativespreviouslymentioned.

PEFcreatedamarketforpandemicriskinsurancethatdrawsonfundsfromtheprivatesectorthrough(ca-tastrophe)bondsandswaps(atemporaryagreementbetweentwopartiestoexchangecashflowsorliabili-tiesfromotherfinancialinstruments,oftenusedtoreducefinancialrisk)inreturnforhighlylucrativeinter-estrates.Itwasheraldedasaninnovativefinancialinstrumenttorevolutionizethechallengeofraisingcapi-tal.(Brim&Wenham,2019)

The "innovative"aspect, ifwe lookat the fieldofglobalhealth security funding, is that rather than relyingonlyonvoluntarycontributions, this initiative isalsoengagingdirectlywithcapitalmarkets (Brim&Wen-

11Thebalancewasissuedtoendowment,around3%forclassAand6%forclassB(WorldBank,2017).12Pensionfundshavebeenprovedtobeoneoftheleadingintermediariesandactorsinfinancialization,alongwithassetmanagers,banks,andmutualfunds(vanderZwan,2014,p.111-2).Johnsondiscussedtheirdualrolesmeticulouslyspe-cificallyconcerningILSinvestmentsinher2013articleoncatbondsandfinancialrisk:"Thedemographicbulgeofretir-eeshasmotivatedpensionfundmanagersontheperpetual‘‘searchforyield’’toseekoutthehigherreturnspromisedbycatastrophebonds.PensionfundswithpubliclydisclosedILSinvestmentsrepresentquitesignificantpoolsofcapitalwithlargememberships.(…)Twolargerglobaltrendswithinpensionmanagementprovidethebackdropforfunds’moveintoILS.First,pensionfunds’assetallocationscontinuetoshiftawayfromgovernmentbondsandtowardsalternativeassetssuchashedgefunds,privateequity,realestate,andasset-backedsecuritiesandderivatives.Thispatternismotivatedbyasearchforexcessreturnsasfundsexpand,moremembersreachretirementage,andpensionerslivelongerlives.”(p.37)


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ham,2019),thusfurtheringneoliberalism.TheEbolaoutbreakprovedtotheWorldBankhowraisingfundsquicklytocircumventapandemiccanbeadauntingtask,andthiswassupposedtocomplementdonors'vol-untarycontributions(Garcia&VanekSmith,2020).TheWorldBankGroupPresidentat thetime, JimYongKim,proudly stated at the launchof thebonds: "Weare leveragingour capitalmarket expertise, ourdeepunderstandingofthehealthsector,ourexperienceovercomingdevelopmentchallenges,andourstrongrela-tionshipswithdonorsandtheinsuranceindustrytoservetheworld'spoorestpeople"(WorldBank,2017).

This ispartofabroaderstrategyby theWorldBank to include financialactors intodevelopmentalefforts.For example, ArunmaOteh, Vice President andTreasurer of theWorldBank, stated in an address back in2018 that theWorldBank "need innovative finance toaccelerate themobilizationof theprivate sector fordevelopment." In the same discourse, she alsomakes clear the objective pursued by the pandemic bondsmorespecifically:

ItwasdesignedtopreventanotherEbolacrisis,andwasthefirsttimethatpandemicriskinlowincomecoun-trieswastransferredtothefinancialmarkets.Suchafacilitywillenabletheworldtorespondmorepromptlythan itdidwhen the2013-2014Ebolacrisishappened, therebyminimizing thedeath tolland thenegativeimpactontheeconomy.(WorldBank,2018)

Takingitatfacevalue,thisappearstobeanattempttotransferthepandemicriskoflow-incomenationstoglobalfinancialmarkets,atleastinpart.Indeed,thesebonds'mainofficialintentistogivedevelopingcoun-triesaccesstofundsintimesofcrisis.Thatiswhatthesebondsareultimatelydesignedtodo;theyarelever-aging investments in the privatemarket to generate funds for crises. However, things are not running assmoothlyasplanned(aswewilldetaillater).

Evenifitiswidelylabeledasinnovative,wecouldarguethatcatastrophebonds,ingeneral,are"technically"somewhatofanovelty,splittingandreconfiguring"peakperilstocreatehybridmultiperil,multiregionsecu-rities" and doing so underscoring "that financialization13 is a selective process that ties specific, often far-flung,placesandgeophysicaleventsintocircuitsthroughwhichfinancecapitalcanmove,ratherthan"rollingout"evenlyacrosseconomiesandphysicallandscapes."(Johnson,2014,p.173)Thisalsogaveusarelevantdefinition of financialization in this specific context. From the perspective of donor countries and eligiblecountriestothataid,catbonds(andpandemicbonds)areattractiveasameansofprovidingaddedmarket-basedsupportincrisis(evenifitstilltheWorldBankanddonorcountriesthatpayforthecoupontobond-holders).Ratherthanrelyingonlyonforeigngovernmentfunding,fundingisgeneratedthroughthemarket,anchoringitintoneoliberalism.

To conclude this section, anotherunusual aspect of this initiative also lies in thepeople andorganizationsbehindthem.Itisinterestingindeedtolookatwhowerethosebehindthedesign,development,promotion,sell, implementation, and arbitration of this "innovative" and "unique" insurancewindow: expertise in thedevelopmentstagewasinitiallyprovidedbyleadingreinsurancecompaniesSwissReandMunichRe.

AIRWorldwidewasthesolemodeler,usingtheAIRPandemicModeltoprovideexpertriskanalysis.SwissReCapitalMarketsisthesolebookrunnerforthetransaction.SwissReCapitalMarketsandMunichRearethejoint structuring agents. Munich Re and GC Securities, a division ofMMC Securities LLC are co-managers.SwissReCapitalMarketsLimited,MunichReandGCSecuritieswerealsojointarrangersonthederivativestransactions.(WorldBank,2017)

13Krippner’sdefinitionoffinancializationgoesinthesamedirection,statingthatitisthe“growingimportanceoffinancialactivitiesasasourceofprofitsintheeconomy”(2011,p.27).


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Furthermore,AIRWorldwideissupposedtobethe"independentagency"todecidewhethertheconditionsofthepay-outhavebeenmet.TheirdecisionsarefinalandbindingonthebondholdersaswellasontheWorldBankitself.ThisUS-basedfirm,apioneerofthecatastrophemodelingindustry14,wasalsotheexternalmod-elingagentofthosebonds(Vossos,2020).Allthisgivesmuchauthoritytooneprivateentitydeeplyinvolvedfromtheearlystagesofthecreationofthosebondsandshowstheconcentrationofpowerinafewcorporatehands.

NowthatwehavedescribedthegenesisofthePandemicBonds,aswellasitsinscriptioninthebroadercatbondsfamily,itsinvestors,anditssomewhatunusual(andquestionable)financialstructure,thenextsectionwilldetailthemaincriticismsthisinitiativehaveattractedsofar.

PandemicBondsunderScrutiny

Somecriticsfromtheget-goWhydidpandemicbondsalmostendup,aswewillsee,workingforinvestorsbutnotforgovernmentsoftheleastdevelopedcountriesandtheirpopulations?Beforetryingtoanswerthiscriticalquestion, Iarguethatevenbeforethecurrentcrisis,manypeople15werehighlycriticalofthosebonds,seeingitastheworst(orthebest)illustrationofcasinocapitalismastheorizedbySusanStrange(1986),andtheshocktherapylinkedtotheriseofdisastercapitalismasdevelopedbyNaomiKlein(2007),andthatsherebrandedrecentlyaspan-demiccapitalism.Thiswastheconsecrationandformalizationofpandemicgamblingandtheepitomeofthe"capitalization of almost everything" (Leyshon andThrift 2007). Brim andWenham (2019) argue that thePEF, ofwhichpandemicbonds arepart of, serves its investors' financial interests at the expenseof globalhealthsecurity."Muchofthecritiqueiscenteredonfundamentalflawsofusingcatastrophebondstofinanceinternationalresponsestopandemicsandthechallengesofprivatesector involvement in financingdiseaseoutbreaks"(BrimandWenham,2019).Aschoff,writingapieceintheJacobinMagazine,alsoraisesawarenessaboutthehypocrisyofthewholenarrativeofcapitalismcomingtotherescueofthemostvulnerable(hencethetitleofthisresearchpaper)andsavingtheworld:

"Sustainable investing" is all the rage thesedays.Pandemicbondsare justone itemonagrowingmenuofenvironmental, social, and governance (ESG) investment products. (...) [A]sset managers and investmentbanks insist that thebestwayto fightpoverty,disease,andenvironmentaldestruction is toputmarketstowork.Ifwegiveinvestorsachancetobothdogoodanddowell—totransformprojectsthattacklepoverty,disease,andenvironmentaldestruction intoaprofit-makingopportunity—ESGenthusiastssaywe'llseearushofprivatecapitalintoeffortsthatgenuinelymaketheworldbetter.It'sjustamatterofgettingtheincen-tivesright.(Aschoff,2020)

14 VeriskAnalytics, aUS-based firm specialized indata analytics and risk assessment, acquiredAirWorldwideback in2002.15Amongthosehighlycriticalpeoplewasapreviousinsider,andnottheleastrenown:LawrenceSummers.HewastheWorldBankchiefeconomistfrom1991to1993,formerpresidentoftheUniversityofHarvard,andofficialinClintonandObama’sadministrations.AtaneventlastyearorganizedbytheCenterforGlobalDevelopment,hemadesharpcriticismagainstwhatheconsidered“anembarrassingmistake”aswellasaconsequenceofthe“financialgoofiness”oftheWorldBank.Amongthemaincausesofthisdisaster,Summersmentioned:“WorldBankofficialswhodidn’tunderstandthefirstthingaboutfinancebut...lovedtheword‘privatesectorinvolvement’”and“bureaucratsatthebankwhowerelookingtomake their careers by having had amajor innovation” (Igoe, 2019). Another high-profile critic isOlga Jonas,who is aseniorfellowatHarvard’sGlobalHealthInstitutionandwhoworkedattheWorldBankformorethan30years.Shecon-sidersthatthepandemicbondsarea“gimmick”(Gross,2020a)anda“photo-op”(Garcia&VanekSmith,2020)


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Nowthatwefacearealpandemic,thosebondsshouldhavebeenreleasedurgentlytohelpthepoorestcoun-tries in theworld to dealwith the current crisis.Unfortunately,manyobstacles canbe observed. Further-more, evennow that the payment has been triggered (aswewill detail later),manypublic health expertsconsideritisalreadytoolatetopreventthepandemicfromaffectingdevelopingcountries.

382pagesofconditionsIndeed, thewholeprocess toreleaseapay-outand theconditions toproceedarehighlyproblematic.First,thereisa12-weekswaitingperiodbetweenthefirstsignsofapandemicandtheanalysis.WithastartdateoftheoutbreaksetonDecember31stoflastyear, inthiscase,it ledustoMarch24th,whichwasfollowedbytwomoreweekstocalculateifconditionsofapandemichavebeenmet.Itisimportanttorecallthatthedeci-sion takenbyAirWorldwide is final andbinding; they reevaluate the situationevery twoweeksafter thatdatetoseeifconditionshadbeenmet,butnoorganizationsnorstatecouldarguewiththedecisionsmadebythatprivateentityplayingthedualroleofmodelerandarbitratorofthosebonds.

Anotherpointofcontentionisthetermsofthepayout,whichareconvoluted, tosaythe least.Thecontractdetailingalltheconditionsforapandemictoqualifyis386pageslong.Conditionsareexceedinglyrestrictive(someexpertsandformeremployeeslikeLawrenceSummerandOlgaJonashavecalledthem"convoluted,""stringent,""ghoulish,"andevenworse),makingthepayoutevenmoredifficultandslow.Tosummarizethemainconditions,acertain"amount"ofdeathsmustoccur(atleast250forClassA,2500forClassB),duringaspecific time, in certain countries (at least two, and other conditions identified the least developed coun-tries16),ataparticularpace:thresholdshavebeensethighandareonlyfocusedoncountrieseligibletore-ceivethishelp.Thisisunderstandableinthedesignoftheconditions.Still,inreality,itputstoomuchoftheburdentoprovethepandemiconcountrieslackingaproperpublichealthsystemorthetestingcapacitiestogetthestatisticsneededtoproceedtothepay-out,whichraisedquestionsofmeasurement(Garcia&VanekSmith,2020;Baker,2020).

Thereiswaytoomuchredtapebetweenthefundsandthecountriesurgentlyneedingittoprepareforthepandemicandhelptheirpopulationurgentlyinneed.Forinstance,evenifitwerecreatedrightaftertheEbo-lapandemictomakesuretohaveasafetynet for futureoutbreaks, thesecondoutbreakofEbola inAfrica,whichhappenedinRDCin2018-2019,didnotqualifiedforthosebondsbecauseoftheinsufficientnumberofdeathinanothercountry(Jonas,2019).

Thosebondsalsohaveanotherproblematicelementcommontoallcatastrophebonds:beinghighlysecretive(Johnson,2014,p.162).Someexpertsnotedthatcatastrophemodelingtendstobetricky"inthatitharnessestacitknowledgesharedwithinclosed,opaquecommunities"(Forgues,Etzion&Kypraios,2020).Intheirre-search, Forgues and his colleagues found that it is not functioning "any better than guesswork" (2020). Itwouldnotbethefirsttimethatamodelwidelyusedinthefinancialsectorprovedtohaveafragileempiricalbasis(MacKenzie,2006).Alotoftheinformationthatwouldbeneededforathoroughanalysisisnotavaila-ble.Consequently,wehave torelyonreporteddata fromthe financialactors themselves,whichcould lackreliabilityaswellasbeingpartial.Theopacity is total for the$USD105million inover-the-counterderiva-tiveslaunchedalongsidethetwoclassesofbonds.NoadditionalinformationhasbeenavailablebytheWorldBanktodetailthekindoffinancialproductscoverednorelementstohelpcharacterizedtheirinvestors.

16Thereare76countrieseligibleatthemomenttoreceivethishelp:countries“meeting”thecriteriaoftheInternationalDevelopmentAssociation(IDA)oftheWorldBankGroup,withaUSD$1175annual incomepercapita,aswellassomesmallislandcountries.Around40ofthosecountriesareinAfrica,around20inAsiaandtheremainderinEurope,LatinAmerica and the Caribbean and Middle East. The whole list is available here:https://ida.worldbank.org/about/borrowing-countries


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Anhypercorrelationofrisks,notadiversificationLast critiqueworthmentioninghere, andmaybe themorecentral toouranalysis, is aboutquestioning themainargumentfromfinancialinvestorstojustifytheuseofthesetypesoffinancialvehicles:portfoliodiversi-fication.Iarguethattheconceptofhypercorrelation,associatedwithnewrisks(likepandemics),raisedseri-ousdoubtsabouttheargumentthatthosetypesofbondsbydistributingtherisksindifferentclassesofassetsachievethediversificationofafinancialportfolio.Keucheyangivesthefollowingaccount:

Newrisks involvemany linesof insurancesimultaneously: life insurance,disabilityannuities, the interrup-tionofeconomicactivitiesanddamagetobothassetsandpeople.Systemicfinancialriskofthesortbroughtaboutbystructuredfinance(Covaletal.,2009)reinforceshypercorrelation(...).Morefundamentally,hyper-correlationisanontologicalfeatureoflarge-scalecatastrophes,whichdisrupthumanactivityonwholeterri-tories.(2018,p.488)

Indeed,theratingagencyDBRSMorningstarmaintainsthatthistypeofbondsattractinvestorsbecauseofitsreputationofbeinguncorrelatedtofinancialmarkets:"however,thecurrentcoronavirusoutbreakisshowingthat thevaluationofpandemicbonds ishighlycorrelatedwith theperformanceofglobal financialmarketswhenitmattersmost."(Tan,2020)

Currentsituation Awaitingadecisiononthepayoutformanyweeks,thefinancialmarketsandinvestorsseemedpes-simistic:pricesplunged,awaitingthedecision17.AirWorldwide,thecorporationinchargeofdecidingifthefundsshouldbedisbursed(brieflydescribedabove),hastakenitsfirstdecisiononApril9th18.Itseemslikeatthisfirstpossiblepay-outdate,thelastcriteriarequiredtotriggerthepay-out,anexponentialgrowthrateinmiddleandlow-incomecountries(amongwhichChina),hasnotbeenmet.However,inaspectacularturna-round, thebonds finallypaidoutat theirnext report,onApril17th. Indeed,AirWorldwidereassessed thesituationandsawthatitmetthelastcriterianecessarytobetriggered:thatthepandemicgrowsexponential-ly in the 76 countries that can benefit from thismoney (Gross, 2020b). USD$ 195.84million has been re-leased,whichcorrespondsto16.5%ofclassAandclassBpandemicbonds'totality.ItisthesteeringbodyoftheWorldBankPandemicEmergencyFinancingFacility(PEF)thatallocatedonApril27thsthisamountto64outofthe76countrieseligibleforhelpasdefinedbytheInternationalDevelopmentAssociation(IDA)oftheWorldBank.Asofthisfall,allfundsfromthisinsurancepay-outhasbeentransferred.(WorldBank,2020c).Nevertheless,formany,theprocesshasalreadydemonstrateditsflaws,amongwhichitsdeadlyslowness.

ConclusionWorldBank'spandemicbonds (andcatbonds ingeneral)are theepitomeof capitalismnot rescuing thosewhodesperatelyneedit,butinsteadbenefitingfromsocietalafflictions.Thisisquiteironicifweconsiderthat17 DBRSMorningstar, a rating agency, said the price for the riskiest bonds (ClassB) “should have droppedmore than80%”,andforthelessriskybonds(ClassA)have“probablyfallenlessthan50%”(Tan,2020).Thatisnotasurprise,asinvestorsaretryingtosecuretheirinvestments.Thetrendistogobacktosaferavenueslikegovernmentbonds.18FromMarch23rdtoApril8th,theyhadtodetermineifthe386-pagesofconditionshavebeenmet.Amongotherthings,theycompared “the two-weekaverageof caseswith theprevious two-weekaverage todeterminewhether thegrowthrateispositive,oneofthepreconditionsforthepayout”(Vossos,2020).


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pandemicbondswereadvertisedasaninnovativesolutionto"tacklesocialillsthroughprivateinvestments"(WorldBank,2017).Aschoffsummarizesthegeneralfeelingquitewell:"Instead,thebondsareyetanotherexampleofhowhollowmostso-calledESGinvestment is.Theydemonstratehowprivate investorshaveanuncannyabilitytoprofitfromsocialills—andhow,evenintimeswhenglobalsolidarityisdesperatelyneed-ed,globalcapitalcannotseemtolookpastthebottomline."(Aschoff,2020)Iftheleastdevelopedcountriescouldhaveaccesstothosefundsbeforethespreadingoftheoutbreak,inordertoprepareadequatelytoad-dressthisglobalpublichealthcrisis, thesituationwouldhavebeendifferent.However,asexplainedinthispaper,itisnotthecase.

Asdemonstratedinthispaper,catastrophebondsareafinancial innovationdevelopedbytheinsurancein-dustry tospreadand"re-entangle" theriskandbecamepopularwith institutional investors,as itwassup-posed to help themdiversify their investments' portfolios. This trend of "insuring the insurable" got evenmoreprominentafterthe2008financialcrisis,andIarguethatthePandemicBondsaretheparamountillus-trationofthisprocess.

Thispaperalsodetailedhowpandemicbondshavebeenunderscrutinysincetheir launch.Their faultyde-sign, immoralcapitalizationofotherpeople's sufferings, theclearprioritygivento financial interests, theiropacityandsecrecy,theoverlyrestrictiveconditionswereemphasizedbymanyexpertsfromthemomentoftheirlaunch.Ifthebonds'aimisreallytopreventpandemics,ifthatwassupposedtobeaconcreteillustra-tionofcapitalismcomingtotherescueofthepoorestcountriesindiresituations,thenthebondsshouldhaveaneasierandfastertriggerforpayout.Speedinessiscriticalhere,andfundsshouldbedisbursedimmediatelybeforeanydiseaseoutbreakbecomesapandemic,notafter.Indeed,itshouldbelinkedtotheWorldHealthOrganizationdeclarationofapandemicorevenearlier,whenitdeclaresaglobalhealthemergencylikeitdidinJanuary.Itshouldnotfollowanexcruciatingwaitingperiodandanobscurecalculationdonebyonecorpo-ration.A logicalalternativewouldbeto forget the ideaofpandemicbondsaltogether,andalongwithBrimandWhinam(2019),togobeyondareformandwhetherchannelingmoneytocurrentunderfinancedestab-lishedmechanismsliketheUN'sCentralEmergencyReliefFund(CERF)andtheWorldHealthOrganization'sContingencyFundforEmergencies(CFE).

Toconclude,thosetypesofbondsneedtopayonceinawhiletokeeptheircredibility.Johnson(2014)saidthatthisisevenapopularopinioniftheinnercircleofcatbonds'investors."theorderlydefaultofbondsandfulfillmentofobligationstotheoriginalcedantswoulddemonstratethereliabilityofcatbondprotectiontobothriskcedantsand insuranceregulators" (p.176). Ifwhatweare facingnowdoesnotqualify to triggerpandemicbonds,whatwould?


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Annex1:IBRDPandemicBondsSummaryTermsandConditions

Source:https://www.worldbank.org/en/news/press-release/2017/06/28/world-bank-launches-first-ever-pandemic-bonds-to-support-500-million-pandemic-emergency-financing-facility


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Centred’étudessurl’intégration

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