If catastrophe finance can help countries cope with natural disasters, why not also disease?
Mexico’s strongest earthquake in a century killed scores of people, flattened hundreds of buildings and left millions without power. The quake was also bad news for the holders of $150m-worth of “catastrophe bonds”, issued only a month before by the World Bank. Buyers were offered an attractive yield in return for the risk of not getting their money back if disaster struck. Once the quake was judged sufficiently disastrous, the money was instead paid to Mexico’s government to help it rebuild.
The initial buyers of the bank’s riskier bonds were told that they faced a 28% chance of losing money to a virus of some kind and a 5.9% chance of losing money to a novel coronavirus in particular. Those odds have now jumped. But the bonds have yet to release money to governments scrambling to prevent a pandemic. Why not?
Critics argue that the conditions are overly stringent, inflexible and dilatory, taking far too long to fulfil. Of course, if the criteria were less strict, investors would have demanded an even higher interest rate on the bond, and if the trigger allowed more scope for discretion, buyers would also have shied away. The charge of tardiness is, however, harder to answer.
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