In the financial market, the new crown virus may just be a gamble

The world has not yet built an effective system to prevent and control the epidemic, and low-income countries are stretched out in the epidemic. (Dongfang IC map)

Three years ago, then World Bank President Jim Yong Kim announced an innovative idea to use capital markets to help low-income countries cope with the epidemic.

The Ebola outbreak from 2014 to 2015 caused 11,314 deaths in Guinea, Liberia and Sierra Leone. Afterwards, the World Bank believes that the world needs a “financial fire brigade” that can quickly deploy in crisis and help poor countries from a financial level.

In June 2017, the World Bank officially launched the PEF plan (Pandemic Emergency Financing Facility), or “Pandemic Emergency Financing Facility”, also known as the Pandemic Bond. This is also the world’s first plague bond, with a total value of about $500 million. The bond is essentially a debt that is tightly tied to a catastrophic event. It uses the capital market to raise funds for investors, betting whether there will be a large-scale epidemic in the next three years. If not, investors will get considerable profits On the contrary, investors will suffer losses and the funds will be used to fight the spread of the disease.

The World Bank had stated in 2019 that they were planning to issue a new round of plague bonds from May 2020, however, the new coronary pneumonia epidemic prevented the World Bank’s footsteps.

At present, “the plague bond has not been cashed, now is the time.” The Washington Post reported.

I bet the world will be peaceful in the next 3 years
In 2015, Bill Gates gave a speech on the plague at TED. He judged that if something could kill tens of millions of people in the next few decades, it might be a highly contagious virus, not a nuclear war. Because the world has not yet built an effective epidemic prevention system.

The “World Health Report 2010” advocates that the general government health expenditures of all countries in the world account for at least 5% of GDP, and personal health cash expenditures account for 15%-20% of total national health expenditures. But until 2016, the global average of this data was just over 3.5%, with 6.1% in high-income countries and only 1.5% in low-income countries.

From this perspective, the plague bond not only solved the financial problems of low-income countries, but also the good intentions of many investors. Arturo Bris and Salvatore Cantale, professors of finance at IMD Business School, have been paying attention to the plague bond. In an interview with this journal, the two professors said that the plague bond not only provides considerable compensation, but also provides a certain hedge for investors. In addition, the plague Bonds have nothing to do with the general stock market performance, but are related to disaster events, so it helps diversify the investor’s investment portfolio. According to reports, the annual interest rate of the plague bond is as high as 8%-12%, and it is paid monthly.

According to information released by the World Bank, 26 investors have purchased plague bonds, most of them from Europe, followed by US buyers, in Asia, Japanese investors bought a small amount of plague bonds, and mysterious buyers came from Bermuda.

These investors bet that the world will be peaceful in the next three years, and there will be no infectious diseases. Of course, investors in plague bonds do not rely solely on luck. “They are all professional buyers. Some spent 20 years accumulating expertise and hiring experts in the catastrophe bond field as managers.” “Euromoney” ( An article from Euro Money pointed out, however, “Because there is no precedent for bond payments for epidemics, it is not easy to predict losses in advance.”

The “fruit” that’s about to fly
According to plan, the three-year plague bonds will expire in July this year, and before the outbreak of the new coronavirus, investors have spent two years in peace. The “harvest period” was almost reached, but everything was broken by the new coronavirus.

According to the current data of the morning star credit rating agency (DBRS Morningstar), the price of B-level bonds with higher risk in the plague bonds has fallen by more than 80%, and their investors may soon lose all their principal; A-level bonds The risk is less, and its price has fallen by nearly 50%.

However, this does not prevent investors from demanding financial instruments such as plague bonds. “Investors’ appetite is endogenous, and their desires are born. As long as the return on these bonds is high enough (or the price is low enough), then they will be very likely to be sold.” Arturo Bris said.

At the moment, everyone’s focus is not on the loss and gains of plague bonds, but how the plague bonds are fulfilled. It is reported that the plague bond has strict payment conditions. The number of deaths in the country of origin exceeds 2500, and the epidemic caused at least 20 deaths in the second country. The most important point is that it must become a global epidemic. After the payment conditions are met, the countries affected by the epidemic can apply to the World Bank for funding.

In this regard, Salvatore Cantale said, “If we measure a plague by the result of the epidemic, that is, the number of deaths, then there is no doubt that we need to wait for the plague to cause damage. But in principle, we do not have to deal with the plague according to the number of deaths. To define, we need to improve the security design of the plague bond so that countries can receive the money early.”

Can the plague bond eventually be cashed out and help low-income countries get bailouts? Or is it just a gamble in financial markets?