Europe’s worsening energy crisis has left utility companies facing massive margin calls that some estimates put above $1 trillion. Two experts explained the dilemma to Insider, and shared what the government could do to step in and assist. “It’s not the fundamentals of these companies that are flawed. It’s the situation that’s rotten that’s been triggered by a targeted attempt to disrupt the market.” Loading Something is loading.
Russia’s cuts to natural gas supplies to Europe have raised fears of a “Lehman Brothers moment” for the energy sector, but analysts point to key differences from the bankruptcy that sparked the 2008 financial crash.
Escalating power prices have sent collateral requirements soaring for energy companies that hedge their sales in futures markets. Estimates for these margin calls top $1 trillion — more than what otherwise healthy utilities can afford.
“It’s not the fundamentals of these companies that are flawed,” Kristian Ruby, secretary general of power industry at Eurelectric, told Insider. “It’s the situation that’s rotten that’s been triggered by a targeted attempt to disrupt the market.”
By contrast, the subprime mortgage crisis nearly two decades ago saddled banks with toxic assets. For Lehman Brothers, it triggered a bankruptcy filing after talks to arrange a rescue failed.
Today, some European governments are already moving to provide liquidity for the energy sector. And power companies will be able to pay those debts back because they still have millions of paying customers and a recent history of making profits, Ruby said.
“We’re not going to see a bubble of fake value explode [like Lehman Brothers], but we could see nasty consequences with healthy companies having to go bankrupt if this isn’t handled well,” he said.
The Lehman Brothers analogy is not accurate because the nature of the crisis is different, Ruby added, though he acknowledged it as a useful way to get lawmakers to take immediate action.
Companies are faltering due to Vladimir Putin deliberately reducing supplies, he explained, and EU governments must extend credit lines to utilities caught in the pinch.
“No sane company has an insane amount of money [for margin calls] that can account for Putin manipulating the market,” Ruby said.
Tim Gramatovich, chief investment officer at Gateway Credit Partners, echoed Ruby’s take. He said it wasn’t that the utility firms were speculating or shorting gas, but they are the ones nonetheless left with the bill if the government doesn’t subsidize their costs.
A Lehman Brothers moment would occur if a government allows a power company to close down, but that’s not what is happening, he added.
“The governments will step in, and are already doing it,” Gramatovich told Insider.
Still, European policymakers must decide if they are going to subsidize consumers or the utility companies, Gramatovich noted. And the final bill isn’t clear yet.
“These are monster numbers,” he said. “Nobody really knows how much money is involved, or the length of the challenge. There’s a war premium and risk premium embedded in the energy markets, but no one knows that number.”