Coronavirus could be the first disease to trigger the so-called "pandemic bonds" created by the World Bank in 2017 to help poor countries deal with disease outbreaks.

The World Bank created an insurance mechanism in 2017 to help some of the world’s poorest countries deal with a possible pandemic. The coronavirus outbreak could lead to its use for the first time – but there are doubts about how effective this tool would be.

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The so-called “pandemic bonds” were created in response to the Ebola outbreak in Africa that killed more than 11,000 people between 2014 and 2016 – and the idea was to transfer some of the economic risks caused by disease outbreaks from under-developed countries to the financial sector.

They work in a similar way to insurance: as long as there is no pandemic, the buyers of these securities make money from high annual interest and premiums, but if an outbreak occurs, they must return all or part of their investment to a specific World Bank fund intended to fight pandemics. In this way, there would be no need for fraught political negotiations when states raise funds to respond to the crisis.

However, pandemic bonds have lost more than 50 percent of their value since the beginning of the coronavirus outbreak originating in the Chinese city of Wuhan.

‘Financial goofiness’

For NGOs and healthcare workers, the new coronavirus – which has infected nearly 80,000 people worldwide, including more than 2,600 fatally, represents a critical test for the viability of this very controversial insurance mechanism.

In April 2019, Larry Summers, the influential former chief economist at the World Bank and former treasury secretary under then US president Bill Clinton, described pandemic bonds as “financial goofiness” and an “embarrassing mistake”.

Olga Jones, a senior fellow at the Harvard Global Health Institute, a former economic advisor at the World Bank and among the most vocal critics of pandemic bonds, has argued that investors have been the only winners – describing them to the Financial Times as a “gamble with taxpayers’ money” at “terrible odds”.

The World Bank has issued two types of bonds. The first covers a wide range of potential pandemics – such as coronaviruses, Ebola, Crimean-Congo hemorrhagic fever and Rift Valley fever. It is considered riskier – and more lucrative – than the second pandemic bond because the conditions triggering reimbursement by investors are easier to meet. The second type covers only the influenza epidemic and potential hypotheses for what could happen with the coronavirus.

When the bonds were first created, investors – mainly pension funds and specialists in “catastrophe insurance” – immediately rushed in to buy these financial instruments and the World Bank had no trouble achieving its goal of selling $330 million (€303 million) in bonds. This eagerness with which they were snapped up suggests that financiers saw them as a great deal.

‘The terms are too stringent’

The devil was in the detail – the 386 pages of documentation setting out how the bonds work and, above all, the conditions to be fulfilled for a pandemic to cause money to be transferred to the World Bank’s special fund. In order to be triggered, the first type of bond requires 12 weeks to have passed since the start of the outbreak (a point which will be reached on March 23 for the coronavirus), 250 people to have died in the country where it began, and 200 deaths in a second country.

In this context, the second Ebola outbreak illustrated the limitations of pandemic bonds. Still ongoing after it started in 2018, this health crisis has already killed more than 2,200 people, almost entirely in DR Congo. But not a single penny has been transferred from the portfolio of pandemic bondholders to the World Bank fund, as 20 people have not yet died from the outbreak in another country.

“The terms are too stringent; it shows how useless this instrument is,” Bodo Ellmers, director of the Global Policy Forum’s sustainable development finance programme, told the Financial Times.

In establishing such tight criteria, the World Bank was partly trying to ensure that the insurance was only triggered in response to a genuine emergency – but also, it seems, to attract investors. That would also explain why the pandemic bonds’ interest rates are so generous, at around 10 percent for the holders of both types.

But in trying to please bondholders, the World Bank seems to be neglecting the interests of the poor countries the insurance mechanism was supposed to help. “The whole scheme is set up to minimise the probability of payout,” Jones told the Wall Street Journal. “The instrument has triggers that are well into an epidemic that’s about to be out of control or already out of control,” she continued.

So by this point in the outbreak, critics of pandemic bonds argue that they will be an inadequate response to a situation that is already out of hand – while it will only benefit countries on the World Bank’s list, under-developed states excluding South Korea and Iran.

Moreover, it takes 84 days after the first WHO “situation report” on an epidemic before the funds can be transferred. In the case of coronavirus, the first such report was issued on January 21, which means that – even if the criteria were reached – poor countries that need the money won’t get the money until April.

This article was adapted from the original in French.

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