IN SEPTEMBER 2017 Mexico’s most violent earthquake in a century has killed dozens of people, flattened hundreds of buildings and left millions without electricity. The earthquake was also bad news for the holders of $ 150 million in “catastrophe bonds” issued a month earlier by the World Bank. Buyers were offered an attractive return for the risk of not recovering their money in the event of a disaster. Once the earthquake was deemed disastrous enough, the money was donated to the Mexican government to help it rebuild.
If these bonds can help countries cope with earthquakes, why not diseases too? A few months before the Mexican disaster, the World Bank sold $ 320 million in pandemic bonds (and some swaps) on behalf of the 77 poorest developing countries it serves. Proponents of these bonds point out that they provide an initial cash commitment, triggered automatically according to predefined rules, which is more reliable than trusting the kindness of strangers. They also reward investors with higher returns for having borne risks not strongly correlated with the rest of their portfolios.
The first buyers of riskier bank bonds (worth $ 95 million) were told they had a 28% chance of losing money from some virus and 5.9 % chance of losing money from a particular new coronavirus. These chances have now jumped. But bonds still have to free up money for governments to struggle to avoid a pandemic. Why not?
Under the terms of the bond, payment can only be triggered 12 weeks after an outbreak has been reported to the World Health Organization (it would be March 23). The virus must have killed at least 250 people in total and 20 people in more than one country (a condition that the Covid-19 virus encountered on February 27, when Iran reported more than 20 deaths). The epidemic must increase further when these other criteria are met. And the amount of money a country can get depends on the number of cases it has confirmed (compared to other countries claiming the money).
Critics argue that the conditions are too strict, rigid and delaying, taking far too long to fulfill. Of course, if the criteria were less stringent, the investors would have demanded an even higher interest rate on the bond, and if the trigger had left more room for appreciation, the buyers would also have fled. The charge of delay is however more difficult to answer. How can such links prevent a pandemic from happening if governments have to wait for verification of its existence first?
If countries react quickly to the danger, by reducing the number of cases, they may therefore benefit from less (or not) money. In normal insurance markets, people who take reasonable precautions pay lower premiums. But in the case of these bonds, the “premiums” are covered by wealthy donors, Japan and Germany.
A case can still be made for such instruments. They encourage better surveillance and reporting of infections. And while existing bonds are too slow, the same goes for more traditional sources of funding, such as the generosity of donor countries. One of the novelties of Covid-19 disease is the speed with which it caught everyone’s attention. The World Bank, for example, said this week that it would provide up to $ 12 billion to help its customers respond to the epidemic, by providing money as quickly as possible. It may take the bank’s pandemic obligations until March 23 to recognize the ongoing disaster. But at least the bank itself doesn’t have to wait that long. ■
This article appeared in the Finance and Economics section of the print edition under the title “A pussyfooting cat bond”
