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Reuters
2 days ago
- Business
- Reuters
Breakingviews - UK's nuclear push may hand investors a cushy deal
LONDON, July 18 (Reuters Breakingviews) - Brookfield's ( opens new tab reported plan to take a 25% stake, opens new tab in the Sizewell C nuclear project would mark a big vote of confidence in Britain's atomic energy revival. But while it suggests that private capital could play a role in funding the country's energy security, taxpayers are likely to take much of the risk. The Canadian giant is no stranger to infrastructure, but nuclear power comes with high upfront costs, delays and cost overruns. Sizewell C could cost up to 40 billion pounds ($54 billion) to build, the Financial Times says, up from the latest government estimate of 20 billion pounds. Britain's track record is far from reassuring. Take Hinkley Point C, which was majority owned by EDF. Construction begun in 2017 and was originally expected to be completed in 2025 and cost 18 billion pounds. It is now unlikely to be operational before 2030, with the overall cost revised to up to 35 billion pounds in 2015 prices. EDF had little protection against those delays as the chief backing it got from the government came from energy price commitments, which kick in when the plant is running. Bringing in private investors may therefore require a new approach. That's why the government passed legislation in 2022 so that the Sizewell C plant will be financed via a model, opens new tab seen in utilities like water companies or energy networks, dubbed the regulated asset base (RAB). That model fixes an allowed return to investors by passing on costs to consumers. Crucially, it allows a project to generate revenue from the moment construction begins, instead of only when it becomes operational. The closest precedent is probably London's Thames Tideway Tunnel, which funded the construction of a new sewer. There, consumer bills are charged enough to cover a blended return to debt and equity investors, or weighted average cost of capital (WACC), of 2.5% over inflation while the project is under construction. Given the risks in nuclear, industry experts reckon a WACC of 4% above inflation is more likely, equivalent to a nominal rate of 6%. And, as with Thames Tideway, nuclear plants will likely require a commitment from the government for it to compensate investors if cost overruns exceed a certain threshold. That's means the RAB model could easily end up becoming pretty expensive. The National Audit Office's modelling suggests that the WACC of a hypothetical nuclear project could rise to 9% if expenses were to come over budget by between 75% and 100%. As Hinkley point showed, that's quite plausible. UK Prime Minister Keir Starmer may not have much choice. The government says, opens new tab it needs new nuclear power stations to help its transition to net zero and ensure energy security threatened by Russia. And Chancellor Rachel Reeves will be loathe to fund them all on balance sheet, given the country's fiscal state. Brookfield's interest shows that institutional investors may be able to step up. But while the financing looks 'private', the real backstop is public. Follow Yawen Chen on Bluesky, opens new tab and LinkedIn, opens new tab.
Reuters
2 days ago
- Business
- Reuters
Breakingviews - Scott Bessent debt plan has awkward historic echo
LONDON, July 17 (Reuters Breakingviews) - Outside the U.S. Department of the Treasury in Washington, D.C. stands an imperious-looking statue honouring the institution's longest-serving secretary. Albert Gallatin was the Swiss-born founding father who engineered the financing of the 1803 purchase of Louisiana via an innovative international bond issue, opens new tab. That famous fiscal coup more than doubled the newly independent nation's territory and established its sovereign credit for the next century. Not for nothing does the monument bear the inscription: 'Genius of Finance'. Scott Bessent, the current occupant of Gallatin's office, faces a task considerably bigger than his illustrious predecessor's. Buying Louisiana cost $15 million, equivalent, opens new tab to around $16 billion today. By contrast, the Congressional Budget Office (CBO) estimates, opens new tab the One Big Beautiful Bill Act (OBBBA) recently passed by Congress will increase the federal government's financing needs by $3.4 trillion over the next decade. Bessent's attempt to square the fiscal circle is reminiscent of an altogether more controversial pioneer of public finance: the 18th-century Scottish economist and speculator John Law, author of the world's first inflationary financial crash. The political stakes are high. In stark contrast to the CBO's pessimistic assessment, the White House Council of Economic Advisers (CEA) expects, opens new tab the president's flagship economic bill to shrink future budget shortfalls by $5.5 trillion. The CBO sees the U.S.'s debt to GDP ballooning to nearly 130%, while the CEA has it shrinking to a relatively frugal 94%. If Bessent manages to realise the administration's vision, he will also have earned a statue on Pennsylvania Avenue. Over the past six months, the outlines of a four-part plan have emerged. The first part is Trump's sweeping tariffs on imports. Economists used to the U.S. championing global free trade were understandably shocked when the president unveiled the levies in April. Yet from a fiscal perspective they are beginning to work. According to, opens new tab Treasury data, customs duties brought in $64 billion in the second quarter of 2025 – nearly $50 billion more than the same period last year – with almost half of that coming in June alone. Over the longer term, trade diversion and re-shoring of manufacturing will doubtless crimp those proceeds. Nevertheless, the bounty lends credence to Bessent's prediction that tariff revenue will top $300 billion in 2025, and to the CEA's prediction that the levies will bring in $2.8 trillion over the next decade. Part two is even simpler: bet on economic growth. The CBO's baseline budget projections assume U.S. GDP will expand by less than 2% a year. The White House thinks that's a desultory underestimate. The CEA points to the artificial intelligence investment boom, rampant growth of private credit, a promised surge of deregulation, and the dynamic effects of the tax cuts and investment incentives embedded in the OBBBA. It predicts these factors will leave the U.S. economy significantly larger a decade from now than the CBO predicts. The non-partisan Committee for a Responsible Federal Budget accuses, opens new tab the White House of 'fantasy growth assumptions'. Bessent is not deterred. After all, stronger growth narrows the financing gap by $4.7 trillion. Part three is to force down interest rates and reduce the cost of servicing the public debt. Interest costs are now the U.S. government's second largest expenditure category, running at nearly $1 trillion a year. For months, Trump has assailed Federal Reserve Chair Jerome Powell for what he claims is excessive hawkishness, dubbing him 'Mr. Too Late', a 'major loser', and a 'stubborn mule', and probed replacing Powell before his term expires next May. The president believes the central bank should drop its policy rate to 1%. Undermining the Fed's inflation-fighting credentials would risk higher longer-term borrowing costs as investors demand a premium to hold U.S. debt. Bessent has a plan to head that off by reducing the Supplementary Leverage Ratio (SLR), which limits the size of U.S. banks' balance sheets relative to their equity capital. Relaxing this rule will enable large lenders to hold more Treasury bonds, offsetting selling by other investors. The Fed is considering the proposal. These measures inch Bessent closer to meeting the White House's fiscal expectations, but won't get him all the way. That's where the fourth and most exotic part of the plan comes in: the promotion of U.S. dollar-backed stablecoins. The GENIUS Act currently passing through Congress would open the floodgates for cryptocurrencies backed by dollar-denominated assets. A surge in stablecoins and a corresponding boost in demand for U.S. Treasury debt, Bessent believes, opens new tab, 'could lower government borrowing costs and help rein in the national debt'. If the tokens catch on with overseas users the resulting extraterritorial seigniorage will also afford Uncle Sam a new way of monetising the greenback's exorbitant privilege, opens new tab. Citi analysts expect, opens new tab the stablecoin market to balloon to $3.7 trillion by 2030, from about $250 billion today. Gallatin would recognise the first two parts of Bessent's plan - the exceptional potential of the American economy and the bumper customs revenues it brings. But pressuring financial institutions to hold U.S. government debt and championing monetary innovation go well beyond anything the financial guru ever dreamt of. They are, however, eerily reminiscent of the infamous 'System' of John Law. In 1715, the Regent of France invited the Scottish professional gambler to cure the stricken superpower of its debt-ridden malaise. Over the next four years he implemented a visionary economic strategy the like of which the world had never seen before, nor has seen since – until now. The lynchpin of Law's scheme was lockstep monetary and fiscal coordination. He founded France's first public bank and introduced a revolutionary innovation – paper money. Then he reformed the tax system and radically restructured the public debt, convincing investors to hold his novel banknotes instead. The result was that the cost of borrowing plummeted to a previously unheard-of 2%. For a brief moment in early 1720, it seemed France's problems had been solved. Unfortunately it all unravelled in an epic inflationary boom and bust. Subordinating monetary to fiscal policy while simultaneously reinventing the means of payment itself proved an unstable combination. Law was driven out of France in ignominy and retired back to the casino in Venice. No statue commemorates his genius – just a plain paving stone in a local church, opens new tab. Is Bessent a 21st-century Gallatin or the reincarnation of John Law? As the Scotsman himself might have put it: 'mesdames et messieurs – faites vos jeux'. Follow @felixmwmartin, opens new tab on X
Reuters
3 days ago
- Business
- Reuters
Kraft Heinz carvery would hinge on new sandwiches
NEW YORK, July 17 (Reuters Breakingviews) - Kraft Heinz (KHC.O), opens new tab is trying anew to squeeze value out of its disastrous deal. As part of a strategic review unveiled in May, the Kool-Aid and Philadelphia cream cheese maker may undo the merger whipped up a decade ago by Warren Buffett's Berkshire Hathaway and Brazilian buyout shop 3G Capital. The success of any split, however, will depend on yet more M&A. The $46 billion blockbuster combination of H.J. Heinz and Kraft in 2015 was predicated on turbo-charging international and North American growth while slashing costs using 3G's infamous zero-based budgeting process. The company's operating profit margin expanded, but sales growth – including from new products such as 'salad frosting, opens new tab' – has been lackluster. Kraft Heinz and Buffett conceded that the acquisition was overvalued, and Berkshire's directors stepped down, opens new tab earlier this year. Given the weak performance, a potential breakup from boss Carlos Abrams-Rivera, as reported, opens new tab by the Wall Street Journal, sounds appetizing in theory. In the 10 years since the merger, Kraft Heinz has generated a negative total shareholder return, including reinvested dividends, of more than 40%. Unilever and Mondelez International, by comparison, have doubled shareholders' money and the S&P 500 Index delivered 260% over the same span. In practice, however, it would serve up bland fare. Most of the legacy Heinz division housing its eponymous ketchup, Grey Poupon mustard and other condiments accounts for 44% of the company's $25 billion in net sales estimated for this year. With an EBITDA margin of 28%, per Bank of America analysts, the business would yield about $3 billion. On a blended McCormick and Campbell's multiple of 11 times, this piece of the enterprise would be worth $34 billion. The Kraft section, including Oscar Mayer hot dogs and Velveeta cheese, is less tantalizing. Put this more sluggish portion on a multiple of 9 times, back out $1 billion of lost synergies – using 7% of sales as a guide – and it imputes $19 billion of value. The $53 billion sum of the parts is about the same as the whole today. Some of Kellogg's special sauce might zest things up. When the Froot Loops and Cheez-it producer split snacks from cereals in 2023, neither company's shares moved much. Only after Mars agreed to pay $36 billion for Kellanova, a 33% premium to its undisturbed price, did the extra value come through. Italian confectioner Ferrero also is now buying WK Kellogg for $3 billion. A similar smorgasbord would help Kraft Heinz cook up a better outcome. Follow Jennifer Saba on Bluesky, opens new tab and LinkedIn, opens new tab.
Reuters
4 days ago
- Business
- Reuters
Breakingviews - UK's deregulation drive fosters wrong type of risk
LONDON, July 16 (Reuters Breakingviews) - Rachel Reeves reckons the City of London needs more dynamism. Britain's finance minister is probably right. But some of her latest reforms, including weaker rules for banks, may raise the risk of economic harm. Reeves's latest bundle of policy proposals – dubbed the Leeds Reforms after the British city where she unveiled them – follows a similar speech last year at the Mansion House dinner, the preferred forum for the chancellor to flaunt her pro-finance credentials. On Tuesday evening she told, opens new tab City grandees that regulation was a 'boot on the neck' of growth, and talked up a range of measures to cut red tape on the financial sector, which accounts for 9% of UK economic activity. Many of the planned reforms are sensible. Watchdogs like the Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA) will face, opens new tab clear deadlines on how quickly to approve new firms and senior managers. Separately, banks may be allowed to alert customers to the fact that money in their cash accounts could be earning higher returns in the stock market, a practice stamped out after the 2008 crisis. Reeves is also considering, opens new tab further changes to tax-free savings accounts, which could in theory include nudging more people into equities. The common thread is that Britain's weighty edifice of rules and regulations has left too much money sitting on the sidelines, harming both savers and the competitiveness of UK capital markets. It's a broadly correct diagnosis. A recent Aberdeen report found, opens new tab that Brits had the smallest percentage of their wealth in equities and mutual funds among the Group of Seven wealthy countries. Other elements of Reeves's reform push, however, could create the wrong type of risk. She touted bank supervisors' decision to raise the balance sheet threshold beyond which lenders must issue loss-absorbing debt to protect depositors to 40 billion pounds ($54 billion), from 25 billion pounds. That's odd since the failure of U.S. lender Silicon Valley Bank in 2023 arguably demonstrated the dangers of not having such a buffer. Supervisors are also extending the implementation deadlines for other global bank-capital tweaks and will report back to Reeves on broader levels of equity among lenders. She wants to ensure that the overall framework strikes the 'optimal balance to deliver resilience, growth and competitiveness'. It's welcome that Reeves recognises Britain's financial sector competes for international business, rather than just existing to funnel capital to UK startups and small businesses. Nevertheless, her deregulatory drive could be dangerous. The surest way to protect economic growth is to make sure systemic banks don't get into trouble. A robust and stable financial system allows credit to keep flowing as the rest of the economy waxes and wanes. Meanwhile, the 42-million-pound fine the FCA slapped on Barclays on Wednesday is a reminder that money laundering controls can be worryingly lax, even at the largest UK banks. Cutting red tape is one thing, but tearing pages out of the bank-regulation rulebook risks going too far. Follow Liam Proud on Bluesky, opens new tab and LinkedIn, opens new tab.
Reuters
4 days ago
- Business
- Reuters
Breakingviews - Guest view: The City of London requires a strategy
LONDON, July 14 (Reuters Breakingviews) - A coherent strategy to foster the growth and competitiveness of the United Kingdom's financial services sector is long overdue. Britain is the second-largest exporter of financial services in the Group of Seven rich economies. The industry, as the Chancellor Rachel Reeves has observed, is the crown jewel in the UK economy. Yet output in financial services has declined since the millennium, particularly since Britain left the European Union, while other services sectors in the UK have powered ahead. Although not the implosion some predicted, the City of London has been suffering a slow puncture as business and jobs in wholesale finance gravitate to the EU and other global financial centres like Singapore, Dubai, and New York. Brexit cost the City some 40,000 jobs according to former Lord Mayor Michael Mainelli, but that is only part of the story. One of the legacies of leaving the EU is that many of the new jobs in wholesale finance are now created in other capitals. One big U.S. investment bank expects the proportion of jobs based in London relative to EU financial centres to shift over time from 90% to more like 60%. Mending the City's puncture demands a comprehensive top-down strategy based on both its strengths as well as the headwinds it faces. So far attempts to address the City's problems have been sticking plaster solutions, involving a half dozen uncoordinated reviews. Some, such as the UK Listings Review conducted by former EU commissioner Jonathan Hill, came up with sensible recommendations. But an overarching strategy has been sadly lacking. Reeves has the chance to change this when she unveils her plan for financial services on Tuesday. There is much at stake. Financial and professional services account for more than 12% of total UK tax receipts – more than the whole education budget. There is also significant opportunity. Trust is a critical commodity that helped the City achieve its position as the leading global intermediary in wholesale finance, managing international capital flows, international investment, and dispensing advice. The uncertainty engendered both by U.S. President Donald Trump's administration and geopolitical tensions makes London's reputation more valuable. However, the chancellor needs to tackle challenges and weaknesses. For starters, the regulatory burden on the City is unnecessarily high. Politicians and watchdogs need to draw a sharper distinction between safeguards for domestic consumers and rules governing wholesale and international activity. Anecdotal evidence suggests that the compliance burden in the UK is higher and more expensive than needed, and lead times for authorisation of new entrants unduly long. The Financial Conduct Authority recognises this difficulty and is now on a mission, opens new tab to reduce regulatory complexity and the administrative burden in wholesale markets. It is also providing extra support for wholesale, payments and crypto assets firms seeking approval to set up in the UK. Then there is the much-debated issue of how much society should be protected from financial failures. Reeves needs to set the tone by clarifying that the public should not expect 100% protection when things go wrong, and by providing unambiguous guidance to regulators about the degree of risk appetite acceptable in international and wholesale finance. There is no point blaming regulators for being too cautious when politicians' expectations and the legislation they have passed drives those bodies to be risk averse. Britain also needs to encourage a move more towards a standards-based regulatory approach to international and wholesale finance, based on outputs rather than binary 'blackline' rules. Such regulations are necessary in areas such as authorisation and capital adequacy. But writing specific rules to cover new, complex, and fast-changing areas of financial activity can be both stultifying and inhibiting. Standards of good practice developed by practitioners have proved an effective complement to FCA regulation in the fixed income markets through the work of the Financial Markets Standards Board, which was set up with official endorsement in the wake of the Libor and foreign exchange scandals. The Standards Board for Alternative Investments has also been effective at promoting good practice in the hedge fund industry. Standards can also be much more effective in new areas such as artificial intelligence, green finance, and cryptocurrencies, where the required outputs can be defined but the means of delivery are fluid. Moving further in this direction should be part of the government's strategy. The UK must also ensure it shows a welcoming face to the talented individuals required in a leading international financial centre, at a time when technology and AI are reaping huge changes. It is unfortunate that many highly paid, wealthy individuals have been leaving the UK, in part because of the abolition of tax breaks for 'non-domiciled' residents. It is welcome that the government appears to be reconsidering its decision to make these individuals' worldwide assets subject to inheritance tax. Finally, there is the EU. With the relationship between the two undergoing a reset, the government should take a hard look at where they can benefit from working more closely together in financial services. Both sides want to strengthen their capital markets and encourage productive investment by life insurance companies and pension funds. As the governor of the Bank of England suggested recently there can be benefits to both sides in closer alignment in financial services. Of course, any dynamic alignment with EU rules will provoke accusations of squandering the opportunities of Brexit. But Britain must face up to the inevitable tradeoffs. Would greater access to the EU financial services market in return for a degree of rule-taking be better than the position the UK is now in? The government has already accepted that dynamic alignment with EU standards on food safety and animal welfare will benefit farmers and the public. So far, the government's main regulatory preoccupation has been to encourage more investment in infrastructure by pension funds. Whatever the merits of this idea, the emphasis should be on developing a strategy for the UK's entire wholesale financial activity. The City's great strength is as an international intermediary. The issues are complex, which is why they have not been tackled before. But there is too much at stake, both fiscally and in terms of influence, to miss this opportunity to preserve and strengthen the City's position.
