Business disruptions in the financial services industry in recent years have ranged from relatively small events, such as power blackouts and computer virus invasions, to horrifying, large-scale terrorist attacks. The next big threat may be a major global health emergency that could kill or incapacitate millions of people.

Medical experts are now warning that it’s only a matter of time before the world battles a deadly flu pandemic. It’s been 36 years since the last serious outbreak and not only are we overdue for another, but strong candidates already appear to be surfacing in rural Asia.

The greatest concern is a strain of Asian bird flu, known as H5N1. The virus is believed to have killed 50-60 people since 2003. It is rife within certain bird populations which have a high mortality rate. And it is spreading. In mid-August, it was confirmed that cases have been found in birds as far west as Russia and Kazakhstan. Cases of H5N1 have been increasing in Vietnam since December 2004.

The fear is the virus will eventually mutate into a strain that transmits directly from human to human. So far, the cases of human infection have been transmitted by birds.
However, the Public Health Agency of Canada notes the virus has shown an ability to mutate, so the possibility of it evolving into a pandemic strain is “a concern.” If it happens, the effects could be frightening.

The Atlanta-based Centers for Disease Control and Prevention warns that a “medium-level” influenza pandemic could infect 15%-35% of the U.S. population and cause 89,000-207,000 deaths. Some 314,000-734,000 people would have to be hospitalized, a further 18 million-42 million would be outpatients and another 20 million-47 million would fall sick. It also estimates the economic impact could range from US$71.3 billion to US$166.5 billion, excluding disruptions to commerce and society.

Using the CDC model, Health Canada estimates the Canadian death toll would be in the range of 9,000-51,000, and the direct and indirect costs to the health-care system would be $10 billion-$24 billion.

Worldwide, it is estimated that the death toll from such an outbreak could reach as high as 50 million, according to Britain’s Department of Health. The low-end estimate of the death toll is 2 million. The burden would probably fall most heavily on developing countries, although rich countries could still expect 280,000-650,000 deaths, it says.

Similar to spanish flu

Some forecasts are far scarier. A report on pandemic influenza from the center for infectious disease research and policy at the University of Minnesota’s School of Public Health says research shows the 1918 flu pandemic, known as the Spanish Flu, killed 50 million-100 million people.

In an article published in Foreign Affairs, Michael Osterholm, director of the CIDRP and professor at the university, writes: “Recent clinical, epidemiological and laboratory evidence suggests the impact of a pandemic caused by the current H5N1 strain would be similar to that of the 1918-19 pandemic.”

If the mortality rates from the 1918 outbreak are extrapolated to the current population, he says, 1.7 million people could die in the U.S., and worldwide the total would be 180 million-360 million. Moreover, Osterholm explains, in the 1918 pandemic more than half of those killed were otherwise healthy 18 to 40 year olds. The virus triggered an immune response that, in turn, damaged victims’ lungs so severely that they died. Those with the strongest immune systems suffered the greatest damage. By contrast, in the other two flu pandemics that occurred in the 20th century, one in the late 1950s and one in the late 1960s, death resulted largely because of secondary bacterial infections in lungs weakened by the flu.

The economic impact of such a pandemic would be staggering. In August, BMO Nesbitt Burns Inc. published a report on the possible impact of a flu pandemic. It was co-authored by Don Coxe, global portfolio strategist at BMO Financial Group, and Sherry Cooper, executive vice president at BMO and chief economist at BMO Nesbitt Burns.

Coxe notes that Asia already has a full-blown epidemic among birds. “If it is hit with a human epidemic, even in just one or two communities, a global pandemic would probably be only days away,” he writes. “When that happens, financial markets could be as vulnerable as unvaccinated humans.”

@page_break@Previous flu pandemics don’t offer much insight into market reaction. And, Coxe says, the next outbreak would be the first since East Asia became part of the global economy.

“A pandemic would hit commodity prices especially hard,” he predicts. “The combination of collapsing demand from China and India, and the likelihood of a collapse in demand for housing and cars in OECD nations, would mean prices of base metals and steel would plunge, probably reversing their entire post-9/11 rally. Oil prices would also plummet, because of the end of the China boom and the sudden reduction of consumers in the OECD. There would be no rush into precious metals from other financial assets because high global death rates would result in large-scale estate liquidation of jewellery.

“Income and profitability of businesses of all kinds would suffer. Financial institutions would be under pressure to sustain services because of employee absenteeism and chaotic markets,” he adds.

After the severe disruption of the markets in September 2001, financial firms are supposed to be prepared for continuing business the next time disaster strikes. The Investment Dealers Association of Canada and the Montreal Exchange Inc. have both passed bylaws requiring members to have business continuity plans in place by July 31, 2006.

Under the requirements, firms are required to develop an adequate BCP, test it regularly
and subject it to review by a qualified, independent third party. The IDA notes the goal is not to completely eliminate service interruptions, which would be impossible. Rather, firms should be able to provide clients with access to their assets within 48 hours of a major business disruption.

Most of the disruptions firms have dealt with in the past few years have been technical in nature, such as power outages and communications systems breakdowns. In the case of a flu pandemic, the challenge would be coping with massive shortages in human resources.
Many people would be sick, many more would be quarantined or otherwise forced to stay home. Many would also die, particularly if the next pandemic follows the 1918 model and attacks the young and healthy, thereby decimating the workforce.

Should such a scenario play out, BMO Nesbitt Burn’s report says, effects could include a rapid drop in consumer spending, deflation, high unemployment and, ultimately, widespread defaults. “Households would be unable to make mortgage and credit card payments. Businesses, as well, would default on their debts,” Cooper writes. “Loan losses at banks could rise sharply as financial institutions scramble to provide liquidity, alleviate or reduce credit burdens, and keep their trading and lending businesses going with severe labour shortages.”

The only winners would be those with large cash reserves who could scoop up distressed assets at rock-bottom prices.

The forecasts are dire but Coxe offers some advice to investors who may decide to prepare for the worst. “Cash, put options on volatile stocks, high-quality bonds and high-quality dividend-paying stocks of companies with minimal exposure to the risks we have described will be the best survival packs,” he says. “They will provide pandemic survivors with the capital to take advantage of the wide array of cheap assets that will be available after the virus has joined its predecessors.”

In the meantime, the BMO Nesbitt Burns report calls for the business community to mobilize and support the worldwide effort to prepare to fight an outbreak. “It is for others to decide the likelihood and severity of the next pandemic,” Cooper says. “What Don and
I have concluded is that the economic and societal effects of a pandemic, even a moderate one, will be so severe that businesses and consumers need to join the medical and scientific community in creating a crisis-prevention and management plan. Investors and business leaders must be aware of the risks and factor them into their strategic planning.”

She calls for governments to fund public health, particularly in poorer regions of Asia, where the next outbreak appears destined to launch.

“In today’s world, the economy is borderless and so are public health and terrorism risks.
Forget the ‘each-man for himself’ psychology of protectionist and anti-globalization rhetoric,” she concludes. “Like it or not, we are all in this together, and we are all dragged downward by the weakest links.” IE