LONDON (Reuters Breakingviews) - Ebola bonds seem like a decent idea. Marrying the good intentions of concerned governments and market incentives sounds a promising way to battle the latest outbreak of the deadly disease, in which 1,800 people have already died. Yet the initiative looks less than the sum of its parts.
With a normal three-year bond, an investor hands over cash, collects three annual coupons, and gets his or her principal back unless the issuer goes bust. The $425 million pandemic bond adds a macabre twist to this credit risk - the buyers, in this case institutional investors like Baillie Gifford, lose their shirts if enough people die from Ebola, or other killers like SARS or Marburg. While this may offend the squeamish, it means the bond issuer - the World Bank - can divert money to affected countries.
Yet Ebola bonds have weird small print. While the current outbreak in Democratic Republic of Congo is small compared to the one that killed 11,000 people in West Africa in 2013-2016, it seems enough to warrant payouts. However, to do so Ebola must kill at least 20 people in at least one other country. So far, neighbouring Uganda has only had two victims. So instead of the $45 million that would be paid out after 250 Ebola deaths, the cumulative $90 million due after 750 deaths and $150 million at 2,500, needy states get nothing.
Purely based on incentives, that implies the staid guardians of private capital at Baillie Gifford should finance their own operation to try to prevent Ebola’s spread beyond Congo until they are off the hook in July next year. Conversely, Congolese health authorities have an incentive to let the virus move into Uganda in order to unlock more aid. So do the governments of Germany and Japan, which cover the $36 million annual coupon on the bonds.
Given the difficulty of disease modelling and lack of data, investors can’t tell whether their 8.5% coupon represents a bargain. Admittedly, the bonds are just one string to the World Bank’s Ebola bow - to date it has handed over $380 million in conventional aid finance. But if the objective is just to save lives, it could just do more of the latter.
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