Pandemic bonds sound like a curious financial concept — but they were brought in by the World Bank in 2017 to help developing economies. Against the odds, the coronavirus outbreak may see investors lose money on them.
A global pandemic? Don’t bet against it. That appears to be the verdict of stock markets around the world, not least when it comes to the somewhat unusual financial instrument known as pandemic bonds. In June 2017, the World Bank — the international financial institution that provides loans to poorer countries — sold around $425 million (€391 million) worth of bonds and derivatives aimed at providing financial support to developing countries facing the risk of a pandemic.
The idea behind the bonds was to place some of the risk for low-income countries of a pandemic onto the financial markets, rather than their own governments’ budgets. Investors who bought the bonds would only lose money if certain trigger conditions relating to a pandemic were met. If those conditions are triggered, the bonds are not repaid in full and the money is used instead to help tackle the crisis in developing countries.
The growing coronavirus outbreak around the world has prompted many of the investors who bought up the bonds to sell them off, as it looks increasingly likely that the conditions for the bonds not to be paid back will be met.