coronavirus pandemic
A SCHEME LIKE NO OTHER
Is Wall Street Behind the Delay in Declaring the Coronavirus Outbreak a
"Pandemic"?
A little known financial mechanism set up by the Wolrd Bank could be behind
the decision not to declare the coronavirus a pandemic
by Whitney Webb
February 26th, 2020
By Whitney Webb Whitney Webb
Alittle known specialized bond created in 2017 by the World Bank may hold
the answer as to why U.S. and global health authorities have declined to
label the global spread of the novel coronavirus a "pandemic." Those bonds,
now often referred to as "pandemic bonds," were ostensibly intended to
transfer the risk of potential pandemics in low-income nations to financial
markets.
Yet, in light of the growing coronavirus outbreak, the investors who
purchased those products could lose millions if global health authorities
were to use that label in relation to the surge in global coronavirus cases.
On Tuesday, federal health officials at the Center for Disease Control and
Prevention (CDC) announced that they are preparing for a "potential
pandemic" of the novel coronavirus that first appeared in China late last
year. The World Health Organization (WHO) has stated that an estimated
80,000 worldwide have contracted the disease, most of them in China, while
more than 2,700 have died.
However, some have argued that the CDC's concerns about a likely pandemic
have come too late and that action should have been taken much earlier. For
instance, in early February, Dr. Anthony Fauci, director of the US National
Institute of Allergy and Infectious Disease, had told the New York Times
that the novel coronavirus is "very, very transmissible, and it almost
certainly is going to be a pandemic," while former CDC director Dr. Thomas
R. Frieden had echoed those concerns at the time, stating that it is
"increasingly unlikely that the virus can be contained."
Despite those warnings, among many others, the CDC waited to announce its
concerns that the virus could spread throughout the United States. Their
Tuesday announcement riled markets, wiping out $1.7 trillion in stock market
value in just two days. The CDC's warning has reportedly angered President
Trump, who accused the agency of needlessly spooking financial markets.
Notably, WHO officials have taken an even more cautious approach than the
CDC in their recent comments, stating that it is still "too early" to
declare the coronavirus outbreak a "pandemic" while also asserting that "it
is time to do everything you would do in preparing for a pandemic."
The refusal to label the outbreak a pandemic is odd, since it refers to an
epidemic or actively spreading disease that affects two or more regions
worldwide. This currently describes the geographical spread of the highly
contagious novel coronavirus, which has now resulted in significant clusters
of cases far from China, namely in Italy and Iran. Countries closer to
China, like South Korea, have also recently experienced an explosion in
novel coronavirus infections.
It is possible that concerns over using the word "pandemic" could upset
global markets and lead to economic turmoil, similar to what happened to the
U.S. stock market following the CDC announcement on Tuesday. Though such
concerns are valid, there is also evidence that a particular class of bonds
issued by the World Bank that are closely related to official declarations
of pandemics may also be responsible for having steered WHO and CDC
officials away from using this term, even though the consequences of doing
so could negatively impact global public health.
Pandemic Bonds: a "scheme like no other"
In June 2017, the World Bank announced the creation of "specialized bonds"
that would be used to fund the previously created Pandemic Emergency
Financing Facility (PEF) in the event of an officially-recognized (i.e.
WHO-recognized) pandemic.
They were essentially sold under the premise that those who invested in the
bonds would lose their money if any of six deadly pandemics hit, including
coronavirus. Yet, if a pandemic did not occur before the bonds mature on
July 15, 2020, investors would receive what they had originally paid for the
bonds back in addition to interest and premium payments on those bonds that
they recieve between the date of purchase and the bond's maturation date.
The PEF, which these pandemic bonds fund, was created by the World Bank "to
channel surge funding to developing countries facing the risk of a pandemic"
and the creation of these so-called "pandemic bonds" was intended to
transfer pandemic risk in low-income countries to global financial markets.
According to a World Bank press release on the launch of the bonds, WHO
backed the World Bank's initiative.
However, there is much more to these "pandemic bonds" than meets the eye.
For example, PEF has a "unique financing structure [that] combines funding
from the bonds issued today with over-the-counter derivatives that transfer
pandemic outbreak risk to derivative counterparties." The World Bank
asserted that this structure was used in order "to attract a wider, more
diverse set of investors."
Critics, however, have called the unnecessarily convoluted system
"World-Bank-enabled looting" that enriches intermediaries and investors
instead of the funds intended targets, in this case low-income countries
struggling to fight a pandemic. These critics have asked why not merely give
these funds to a body like the Contingency Fund for Emergencies at the World
Health Organization (WHO), where the funds could go directly to affected
countries in need.
Notably, WHO determines if a pandemic meets the criteria that would see
investors' money be funneled into PEF as opposed to their own pockets, which
would take place if no pandemic is declared between now and when the bonds
are set to mature this upcoming July.
In 2017, the news site Quartz described the mechanism of "pandemic bonds" as
follows:
Investors buy the bonds and receive regular coupons payments in return. If
there is an outbreak of disease, the investors don't get their initial money
back. There are two varieties of debt, both scheduled to mature in July
2020.
The first bond raised $225 million and features an interest rate of around
7%. Payout on the bond is suspended if there is an outbreak of new influenza
viruses or coronaviridae (SARS, MERS). The second, riskier bond raised $95
million at an interest rate of more than 11%. This bond keeps investors'
money if there is an outbreak of Filovirus, Coronavirus, Lassa Fever, Rift
Valley Fever, and/or Crimean Congo Hemorrhagic Fever. The World Bank also
issued $105 million in swap derivatives that work in a similar way.
(emphasis added)"
In 2017, the World Bank issued $425 million in these "pandemic bonds" and
the bond sale was reported to have been 200 percent oversubscribed, "with
investors eager to get their hands on the high-yield returns on offer,"
according to reports. The premiums bondholders have received thus far were
largely funded by the governments of Japan and Germany, who are also the top
nation-state funders of WHO behind the United States and United Kingdom.
Reports have claimed that most of the bondholders are firms and individuals
based in Europe.
Some analysts have argued that these pandemic bonds were never intended to
aid low-income pandemic-stricken countries, but instead to enrich Wall
Street investors. For instance, American economic forecaster Martin
Armstrong has called the World Bank's pandemic bonds "a giant gamble in the
global financial casino" and a "scheme like no other," recently arguing that
these bonds could present a "a structured derivative time bomb" that could
upend financial markets if a pandemic is declared by WHO. Armstrong went on
to say that it is in WHO's interest to declare the coronavirus outbreak a
pandemic, but noted that, in doing so, they would cause bondholders to take
significant losses.
Even establishment economists like former World Bank chief economist and
Secretary of Treasury Larry Summers have criticized the World Bank's
program, dismissing the PEF as "financial goofiness." Bodo Ellmers, the
director of the Global Policy Forum's sustainable development finance
program, has similarly called pandemic bonds "useless," while Olga Jonas,
who worked at the World Bank as an economist for over 30 years, said the
program was "designed to fail" because the bonds were crafted in order "to
reduce the probability of payout."
Economic and business analyst and host of the podcast "Quote the Raven"
Chris Irons told MintPress News that, with respect to the pandemic bonds,
"What's important is to focus on who stands to benefit from this not being
declared a pandemic," a difficult task given that the identity of most
bondholders are not currently publicly available.
Irons also noted that, in his opinion, "WHO and the CDC have been caught a
little flat-footed here" and that some governments that fund WHO,
particularly the Trump administration, appear "more concerned with the stock
market than giving people information that may be necessary and vital." He
added that behind-closed-doors pressure on WHO by those who stand to lose
financially from an official declaration of a pandemic would be
"unsurprising."
How to trigger a payout
As the coronavirus outbreak grows, concern has grown among those invested in
pandemic bonds that payout to countries affected by coronavirus will be
triggered, despite the clear delay by WHO in declaring the outbreak as a
pandemic. While WHO could theoretically alter the criteria that would
trigger payout and cause bondholders to lose big, some recent reports have
claimed that bondholders are seeking to rid themselves of the bonds prior to
their July maturation date.
German media outlet Deutsche-Welle noted that the trigger for the first
class of pandemic bonds, valued at $225 million, would normally have already
been met due to the criterion of more than 2,500 deaths in a "developing
country." However, WHO has said this does not meet said criterion because it
does not consider China to be a developing country, even though the World
Bank's own criteria do consider China to be a developing country.
For the second and riskier category of pandemic bonds, those bonds are
triggered when the disease in question crosses an international border and
causes more than 20 deaths in the second country. At the time of publication
of this article, Iran has recorded at least 50 deaths, which should have
triggered this second category of pandemic bonds, valued at $95 million.
Yet, WHO yet to comment on how this criterion for the second category bonds
has been met.
The WHO's decision to refuse to use the "p-word" may be the result of
several factors, though the pandemic bonds loom large as a $425 million
incentive for not doing so. While avoiding the use of the term may please
pandemic bondholders, it is set to have major negative consequences for
global public health, particularly given the fact that early action against
epidemic and pandemic outbreaks is widely considered to be an imperative.
