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By Nicole Gelinas

After The Fall: Saving Capitalism From Wall Street--and Washington

Eye on the News

Nicole Gelinas
Too Radioactive to Fail
A bailout of Japan’s Tepco would send all the wrong signals.
1 June 2011

Three years ago, financial markets suffered what’s popularly called a “meltdown,” and governments came to the rescue with multitrillion-dollar bailouts. Nearly three months ago, a Japanese nuclear-power installation began to suffer a real meltdown, and now Japan’s response might include a financial bailout of nuclear-power company Tepco. If the bailout happens, it will be at least as damaging as those given to the financial firms, making it more difficult to determine how risky Japan’s nuclear power is and how much it should cost to compensate for that risk.

The event that precipitated the bailout talk was, of course, the 9.0-magnitude earthquake that hit Japan on March 11. The quake spawned a tsunami that swamped the Fukushima nuclear installation, disabling regular and backup safety systems and causing a “substantial meltdown” at one reactor “early in Day 1,” the Wall Street Journal reported. Since then, two more of the plant’s six reactors have suffered meltdowns. Government and Tepco officials continue to struggle not only to cool the nuclear fuel rods but also to stop radioactive leaks into the air and water. People who live in an area up to 18 miles around the reactor are uncertain when, if ever, they’ll be able to return home.

Even as the Japanese recover and rebuild, a banality intrudes: money. Before the earthquake, Tepco already owed creditors about $90 billion, including about $25 billion in loans from big Japanese banks. In the past ten weeks, financial markets and credit-rating agencies have wondered how Tepco will pay that money back. The company faces tens of billions of dollars’ worth of compensation claims from people who lived and farmed in the region at the time of the disaster, and some of its major assets are consuming money rather than producing it. Last month, the company recorded a $12 billion annual loss, a record for a Japanese industrial firm.

In early May, a top Japanese government official, Chief Cabinet Secretary Yukio Edano, had an idea: rescue Tepco. Japan would borrow money through a government-guaranteed, special-purpose vehicle and then give that money to Tepco, which would use it to pay victims as well as to clean up and rebuild. Tepco’s creditors, Edano gently added—in return for this rescue of a company that owed them so much money—should offer some debt forgiveness. It would be “impossible,” he said, to garner public support for the bailout package unless the creditors shared the pain. The nation’s finance minister, Yoshihiko Noda, added that the government had to “minimize the burden for the Japanese public.”

The remarks sparked controversy. Katsunori Nagayasu, head of banking giant Mitsubishi UFJ, called the government’s request for creditors and investors to take a limited hit “unreasonable.” Yasuchika Hasegawa, the chief of a corporate-lobbying group, criticized Edano for being “rash.” They’re right, but not in the way they mean. Japan should refrain from any kind of bailout and let free-market capitalism work by allowing the bondholders, lenders, and shareholders in a profit-seeking enterprise to shoulder that enterprise’s losses without government interference. If Tepco doesn’t have the resources to compensate victims, the Japanese government can do that job directly.

Opponents of this course of action could wield two arguments. One is that the tsunami’s impact on Fukushima was an unforeseeable, unpreventable event and that Tepco investors shouldn’t bear the costs of a natural disaster that is no one’s fault. The other argument acknowledges that the meltdown was preventable: watchdogs had long questioned the wisdom of building nuclear stations in earthquake zones and had also questioned the adequacy of Tepco’s backup systems. But the responsibility to prevent disaster lay with regulators, not the company, this argument goes, and so it isn’t fair to penalize the company’s creditors. As Mure Dickie, the Financial Times’s Tokyo bureau chief, wrote last month, “It was the state that designed Japan’s nuclear power industry and built the regulatory regimes that failed to ensure its safety.”

Neither argument justifies a public bailout, however. Perhaps the nuclear disaster was unforeseeable. Well, now investors know what can happen. They can apply that wisdom toward assessing the impact that natural disasters elsewhere could have on nuclear installations. And perhaps regulators did fall down on the job. One of the risks that investors take in trusting their money to a highly regulated entity is precisely that regulators won’t perform well. Here too, investors can learn from the Fukushima lesson, wondering in the future if regulators are too cozy with the industry that they regulate, thereby magnifying risk instead of reducing it.

But investors can’t determine anything if they’re immunized from losses via government bailout. If Tokyo protects bondholders and lenders to Tepco, investors will know that if disaster strikes again, Tokyo will respond as it did this time. Instead, investors need to receive clear market signals—and send them. That is, after taking serious losses, investors would be forced to revise their assessments of nuclear risk and of regulators’ policies. Those revised assessments, in fact, could improve safety at plants, not just in Japan but globally.

In the most extreme case, if investors determined that a nuclear operator simply couldn’t improve safety enough to justify their investments, they could refuse to lend more money without explicit government guarantees. Such an outcome wouldn’t be a market failure. Rather, it would make clear to citizens worldwide that markets had freely assessed the risk of nuclear power and determined it to be unknowable.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.

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