Containing Tokyo Electric

Fears that the Japanese government could be forced to bail-out the company at the centre of the world's worst nuclear accident in a quarter of a century, have sparked concerns over some of Japan's leading financial institutions that are exposed to the troubled utility.

Yesterday, Tokyo Electric Power Co (Tepco) said it would seek financial assistance from the Japanese government as it struggles to contain radiation leaks from its Fukushima Daiichi nuclear power plant. It was the first indication from the company, which last week raised $25 billion in emergency funding from three of Japan's largest banks, may have insufficient funds to cover the cost of the crisis.

"Given reconstruction costs, including LNG and other fuel costs, the situation is such that no matter how much we have, it won't be enough,” Tepco's chairman, Tsunehisa Katsumata said. "We will discuss the matter with the government and make efforts to ensure we do not run out of funds.”

Tepco, the world's largest private utility, has seen its shares battered since the its nuclear plant was damaged by the devastating earthquake and tsunami that hit Japan on March 11. Tepco's share price has plunged by almost 80 per cent since the accident, to hit ¥466 ($5.65) a share, their lowest level in nearly half a century.

Investors are worried that the Japanese government may decide to nationalise the troubled utility. Alternatively, it may demand a majority stake in Tepco, in exchange for agreeing to a bail-out. This would see Tepco issuing new shares to the government, which would dilute existing shareholders. In addition, bondholders are worried that they may also be forced to accept some write-downs as part of a government bail-out.

Katsumata acknowledged yesterday there was a lot of discussion about Tepco being nationalised, but said he would do his best "to ensure Tepco remains as a private company.”

The troubled utility's top shareholders include major insurance and financial groups, such as Dai-Ichi Life Insurance, Nippon Life Insurance, the Tokyo Metropolitan Government, Sumitomo Mitsui Financial Group and Mizuho Financial Group.

But there are also concerns that life insurance companies, banks and pension funds – including Japan's Government Pension Investment Fund – who hold more than five trillion yen ($61.2 billion) of Tepco's corporate bonds, could also suffer losses if the Japanese government injects fresh funding.

Tepco's corporate bonds were popular among conservative, institutional investors because they were considered extremely low-risk. But this perception has turned around sharply since the March 11 earthquake. The cost of insuring $10 million of Tepco debt for five years using credit-default swaps has soared to $400,000 a year, compared to around $40,000 before the quake.

Meanwhile, Tepco's engineers are still struggling to escalating radiation leaks from the nuclear plant. Yesterday, the company conceded that the level of radioactive iodine in the seawater of the coast of Fukushima had soared to 3,350 times the government approved standard.

Fears of radioactivity are also spreading way beyond Japan. According to a report in the German magazine, Der Spiegel, German port authorities are unsure about what to do when ships start arriving in Europe, which may be carrying cargo contaminated by radiation following the Fukushima nuclear crisis.

According to Der Spiegel, the first such vessels are expected to start arriving at German ports in mid-April, and could be sent away if they are deemed to be contaminated (Fukushima's first political victim, March 29).

According to the report, radiation fears have already had an impact on Japan's seaborne trade. "The Japanese container ship MOL Presence, which had passed 120 kilometers (75 miles) away from Fukishima, was turned back from the Chinese port of Xiamen last week after elevated radiation levels were detected”.

Earlier this week, Japanese prime minister, Naoto Kan, told Parliament that the earthquake, tsunami and the ensuing nuclear accident "may be Japan's largest-ever crisis.” With the damage that the nuclear crisis is inflicting on Japan's economy and its global image growing by the day, few would disagree with his grim prognosis (Don't expect a V-shaped Japanese recovery, March 28).