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South Korea shows what a nuclear-powered future might look like

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Pressure is rising to find alternative energy sources before a looming electricity crunch hurts both consumers and manufacturers. South Korea may have the answerSouth Korea shows what a nuclear-powered future might look like

It’s time to get realistic about the worsening energy situation. A power shortage is approaching and few alternatives to bridge the green transition exist right now. Nuclear is re-emerging as a front-runner, as are doubts and skepticism around its safety as memories of past accidents loom large along with haunting images of mushroom clouds. South Korea, though, shows why nuclear isn’t just a pipe dream — or a fuel to fear.

The country’s worries — like those of many others — aren’t just people feeling cold this winter, or rising prices. It’s the lack of electricity that will ultimately hamper everything from industrial production of goods and food to electric vehicles and the infrastructure to charge them — industries account for over half of the nation’s consumption. South Korean firms that supply high-tech goods to the rest of the world, including cars, batteries and chips, seem to have come to that realization. These energy-intensive sectors won’t run on wind, solar and biofuels alone because the actual capacity just isn’t enough and for large-scale operations, it isn’t consistent. If power starts becoming an issue, so will their profits and global technological heft.

Powering Up

In South Korea, nuclear generation, a baseload source, accounts for over a quarter of electricity production.

To deal with it, South Korea’s biggest companies are putting their weight behind nuclear power plants, which contribute to about 27% of electricity there — an astute move. Samsung C&T Corp., the trading and construction arm of the Samsung empire, is working with NuScale Power Corp. to construct the first small modular reactor, or SMR, in the US and in eastern Europe. Meanwhile, Doosan Enerbility Co. has also tied up with NuScale to supply equipment. The US firm is the first and only to have had its SMR design receive certification — after a rigorous review process by the US Nuclear Regulatory Commission.

The likes of Daewoo Engineering & Construction Co. and Hyundai Engineering & Construction Co. are also working to push nuclear forward, while Bill Gates-backed TerraPower LLC is teaming up with South Korean chaebol SK Inc. to commercialize its advanced reactor technologies.

All told, the country has around two dozen atomic power plants. There is serious political will behind these efforts now, with recently elected President Yoon Suk Yeol pushing for nuclear to surpass coal usage. A draft long-term energy plan released recently calls for 201.7 terawatt-hours of electricity from nuclear by the end of the decade, or about 33% of the country’s total, aided by six new reactors. Coal, natural gas and renewables will each make up just over 20% of generation.

The economics work, too: Nuclear has a clear cost advantage. As state-owned utility Korea Electric Power Corp. noted in its annual filing earlier this year around extending the life of its nuclear units, the failure to do so “would result in a loss of revenues from such units and the increase in our overall fuel costs (as nuclear is the cheapest compared to coal, LNG or oil).” For businesses, it costs 61.5 Korean won per kWh compared with 149.9 Korean won per kWh for solar, helping keep electricity prices low.

Instead of just going green, private and state-backed companies in South Korea are squarely focused on the commercialization of technologies. Nuclear energy consumption hasn’t declined since at least 2017, despite the previous administration’s plan to phase it out. Building facilities is relatively economical in the country, with the overnight cost — the price of constructing a plant without any incurred interest — the cheapest among the developed world and even lower than in China and India.

South Korean companies’ recent deals are focused on manufacturing and building nuclear technology, not just exploratory efforts to advance a far-off investment. A big advantage is that they draw from the existing supply chain. Parts are brought to the site and assembled there. Large manufacturers are already making the equipment and know how to run technical operations. Meanwhile, the government recently signed agreements with nuclear energy equipment makers to boost the industry by providing financing, research and development funds.

Part of the broader nuclear power problem is that countries facing energy supply issues haven’t kept up their facilities, or have abandoned the technology altogether. Decommissioning these plants has added costs, too. Now, as the pressure rises to find alternative sources to reduce Europe’s heavy reliance on Russian gas, there’s little that can be done in a short period of time. French state-owned firm Electricite de France SA is exploring keeping two of its UK plants open for longer, as it also struggles to run them efficiently. Germany will make some of its facilities available to get it through the colder months.

The ability to tap existing nuclear resources is set to help dynamics across the world: The head of the International Energy Agency recently said Japan’s restart of more nuclear power plants would help ease energy supply issues because global gas availability would rise.

This isn’t to say that South Korea has got its nuclear bet totally right — it’s had its fair share of hitches in the domestic industry. As with facilities elsewhere in the world, there are questions around how it will manage the waste. Still, it has been working on a near-surface disposal system, which would alleviate concerns about radioactive waste material. NuScale’s reactors, for instance, use fuel that is consistent with the type used in the light pressurized water-type reactors employed today. The US has been safely storing it for more than six decades. In addition, newer modules are developing designs that could reduce the overall inventory of spent quantities.

Even Indian bonds are not spicy enough for global investors to bite

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What will break the impasse and when? Apart from some simplification of processes and taxation, a lot will depend on the Reserve Bank of India's policies, especially on exchange rates.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City (Photo: Reuters)

The one-two punch of rising  and a strengthening dollar is making investors crave spicy yields.  were in turmoil last week when 10-year UK gilts struggled to find takers even at 4.5% — and only calmed down when the Bank of England stepped in as a buyer. However, it isn’t just British fare that’s getting passed up for being too bland. Look at a large emerging economy like India, which has tried for three years to get asset managers to commit to its $1 trillion government bond market. But they’re stalling. Why aren’t 7%-plus yields hot enough for them?

FTSE Russell said Thursday that it would continue to keep  bonds on its watch list for possible inclusion in its emerging  debt index until March 2023, when the next assessment is due. Separately, Reuters has reported that India’s much-desired entry into a similar benchmark maintained by JPMorgan Chase & Co. may also get pushed out to next year. A decision is expected in the coming days. (Bloomberg LP is the parent of Bloomberg Index Services Ltd., which administers indexes that compete with those from other service providers.)

Foreigners own just $17.8 billion, or 2%, of  bonds. By contrast, overseas ownership is more than a third in Indonesia and nearly 10% in China. In 2019, the government of Prime Minister Narendra Modi flirted with sovereign dollar debt, but dropped the inaugural $10 billion issuance when it drew flak. And rightly so. It would have been risky for a government that has always struggled with high budget deficits to borrow in a currency the country is often short of, thanks to its heavy energy imports. The revised aspiration since then has been to get as much as $40 billion over two years (in rupees, not dollars) by pushing for India’s inclusion in global bond indexes.

That’s the right way to go, but pesky taxation issues have come in the way. New Delhi imposes up to a 30% capital-gains levy on listed bonds sold within one year. There is also a 5% withholding tax on interest income for foreign portfolio investors.


With Russia going off the benchmarks, asset managers would welcome the yield kick India would offer. However, they’re hoping that in its desperation to find a new source of capital ahead of further rate increases by the Fed, the Modi administration will blink first and offer tax concessions. Hence, the standoff. That any trading in rupee bonds may have to be settled onshore, and not on an international platform like Euroclear, isn’t the showstopper it’s often made out to be. As Bloomberg  noted last week, even Indonesian and Chinese bonds aren’t on Euroclear but are part of the JPMorgan Index. The real issue is that the operations people at large asset managers are balking at the idea of getting a tax certificate ahead of settling each trade onshore in India.

What will break the impasse and when? Apart from some simplification of processes and taxation, a lot will depend on the Reserve Bank of India’s policies, especially on exchange rates.

While the relentless surge in the dollar is putting pressure on economies across Asia, responses by individual nations have been “eclectic,” as Nomura Holdings Inc. noted recently. The Philippines, China and South Korea have taken a more hands-off approach to depreciation, while India, Thailand and Indonesia have intervened more heavily and sold a larger number of dollars from their official coffers to shore up their local currencies. The RBI’s reserves, which were as high as $641 billion last September, are down to $537 billion and falling. The question before investors is, how long before the RBI switches tracks? In 2013, when India got dragged into the Fed’s taper tantrum, its hard-currency war chest was enough for six months of imports. In Nomura’s estimates, the current coverage is adequate for a little over eight months.

A more laissez-faire approach to the exchange rate won’t be an easy choice. The risk is that the rupee becomes a sitting duck for speculators trying to pull it down in one-way bets. In that case, no investor — equity or bond — will venture near India. The outlook for next year’s economic growth, already uncertain because of cratering global demand, will become more dicey.

Maybe the trick is to just suspend the ambition of landing $40 billion in foreigners’ money until the Fed is finished tightening. Right now, an investor gets virtually no additional kick by giving up on three-year US Treasury yields of 4.2% and exploring options half a world away. In the foreign-exchange market, the cost of insuring against rupee deprecation eats up almost the entire 3 percentage point extra yield offered by  debt of similar maturity. By that yardstick, the three-year British gilt yields are even less appetizing — which is why analysts mostly agree that the Bank of England will have to keep raising rates. India, too, increased its policy rate by half a percentage point for a third straight time last week to 5.9%; economists expect the RBI to be done only when it reaches 6.5%.

A combination of high yields and a sufficiently-weakened currency could finally convince global investors to bite. For now, though, it looks like they may work up an appetite only by next year.

No Credit Suisse isn't on the brink

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The Swiss bank has enough capital, but volatile markets have deepened worries and raised the costs of its restructuringNo, Credit Suisse Isn't on the Brink - Bloomberg

Credit Suisse Group AG is in a tight spot, but it isn’t “on the brink,” as the fevered typists of social media imagined over the weekend. The Swiss bank, however, is going through its darkest hours at exactly the worst time, when markets are volatile and everyone is nervous about what’s around the corner. Disappointment is still more likely than disaster.

The terms of trade in financial markets are worsening for all players. This is a new era of higher volatility as policymakers raise interest rates to battle inflation, increasing trading costs and risks. It’s a time when missteps by politicians or central banks can suddenly expose surprising concentrations of risk — just look at last week’s entanglement between the UK government bond market and Britain’s pension funds.

Unfortunately for Credit Suisse, this is going to encourage companies, investors and savers to do more business at banks with the strongest balance sheets and most stable business models, making speed crucial for Chairman Axel Lehmann to complete the bank’s strategic review and get its restructuring underway. On the one hand, the Swiss lender is just suffering a more exaggerated version of the travails of its peers. But the collapse in its share price and sharp rise in the cost of buying insurance on its bonds are making its turnaround harder. And there’s another three weeks until it’s scheduled to tell investors how it will cut back its investment bank to focus more on wealth management.

The bank has more than enough capital to run its business. It just isn’t making good enough returns. To change that picture quickly, it needs money to pay for a restructuring — analysts estimate potentially $4 billion through asset sales or capital raising. Without that, the less it can change and the longer its troubles will last. The weaker it appears, the costlier it’ll be to raise any money and the harder it will get squeezed by potential buyers of any of its assets. Markets feed on desperation, and you’ll find fewest friends when you’re most in need.

But this is a story of relative decline, not one of bank runs or existential crisis. This is well known to investors and analysts who follow Credit Suisse but not so much to the broader market. That’s why the sharp rise in the cost of protecting Credit Suisse bonds against default in derivatives markets spooked some finance professionals as well as social media.

Senior Credit Suisse executives spent time reassuring clients and counterparties over the weekend about the health of its balance sheet, the Financial Times reported. In the US, some investors began to fret about contagion to the banking system there from problems at a large European bank. Citigroup Inc. banks analyst Keith Horowitz was moved to pen a note to clients reassuring them that the “current situation is night and day from 2007.”

Investors and traders are jittery because the cost of protecting bank debt against default using credit default swaps (CDS) is rising everywhere. Some are starting to see a harbinger of bank failures, but that’s wrong. A lot of this rise is a function of how banks manage the risks of trading with each other — and of how their clients also manage that risk.

When banks trade with each other, there is always a risk that one bank fails to fulfil its side of the bargain – that is called counterparty credit risk. The world of over-the-counter derivatives, those that aren’t traded on an exchange or through a clearinghouse, are one big source of counterparty risk. Just how much is involved depends on the size of your trading book but also how volatile is the underlying market. High volatility often means more — and more frequent — collateral calls, as Britain’s pensions industry showed last week.

Banks (and their clients) also need to look at the financial strength of their trading partners as they work out what risk they present: Credit Suisse’s collapsing share price makes it look riskier than some rivals. This is a real problem because it makes the bank a costlier counterparty and less competitive. Deutsche Bank went through a similar thing around the final months of 2016, when its capital base was weak and it faced a potentially existential fine from US authorities. Credit Suisse isn’t in such dire straits as Deutsche Bank was then, but losing revenue will still be painful.

There is a further nuance worth noting that explains why the headlines about Credit Suisse are worse than the reality. Without laboring the technicalities too much, many European banks have two kinds of CDS that refer to senior debt: One is riskier and less widely traded than the other. These exist because different creditors get different treatment under bank resolution rules: Depositors and derivative counterparties typically are more likely to get their money back if a bank gets wound up than are bondholders.

Long story short, and slightly simplistically: There is a CDS for senior bonds and a less risky CDS for counterparty credit risk. The former version is often more volatile, the latter is more important for competitiveness and revenue. For Credit Suisse, it’s the more volatile, riskier version that has gone wildest in recent days and become a popular chart for Twitter’s excitable storm chasers.

Credit Suisse is still priced as a riskier counterparty than Deutsche Bank or Barclays Plc, for example, but it’s not in existential peril today. It is at a business disadvantage and faces another hurdle to its restructuring . Nothing that has happened in markets or been communicated by the bank since it launched its review in the summer has been helpful. Financial markets aren’t getting any friendlier. The quicker that Credit Suisse’s board can complete its strategic plan and end the uncertainty the better.

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