Breakingviews - Ebola bands are a great way to fight pandemics

Breakingviews - Ebola bands are a great way to fight pandemics

A Uganda health worker administers a baby's ebola vaccine in the village of Kirembo, close to the border with the Democratic Republic of Congo in the Kasese area, Uganda 16 June 2019.

LONDON (Reuters Breakingviews) – Ebola bonds look good. The intention of marrying governments and associated market incentives is an optimistic way to get married to tackle the latest outbreak of the fatal disease, where 1,800 people have already died. But it looks less than the sum of its parts on the initiative.

With a normal three-year relationship, an investor handles cash, collects three annual coupons, and gets his principal back if the issuer does not bust. The pandemic band adds $ 425 million to this credit risk – the buyers, in this case, institutional investors like Baillie Gifford lose their shirts if many people die from Ebola, or other mariners like SARS or Marburg. While this may overwhelm it, it means that the issuer can bond – the World Bank – to divert money to countries concerned.

But Ebola's bonds have a little weird print. While the current outbreak in the Democratic Republic of Congo is small compared to the outbreak of 11,000 people in West Africa in 2013-2016, it seems sufficient to warrant payments. However, to do this Ebola must kill at least 20 people in at least one other country. So far, there are only two victims at Uganda neighborhood. So instead of the $ 45 million paid out after 250 Ebola deaths, the cumulative $ 90 million due after 750 deaths and $ 150 million at 2,500 state states, doesn't get anything.

Basically, based on incentives, suggesting that the state of private capital guardians at Baillie Gifford should fund their own operation to try to prevent Ebola spreading over the Congo until they are out of the button in July next year. Conversely, Congo health authorities have an incentive to move the virus into Uganda to unlock more aid. So do German and Japanese governments, which cover the annual coupon $ 36 million on the bonds.

Due to the difficulty of disease modeling and lack of data, investors can not say the equivalent of 8.5% coupon and market. Of course, the bands are just one string with the World Bank's Ebola bow – to date it has given $ 380 million in traditional aid funding. But if the purpose is to save life, it could do more for the most part.


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