Europe’s energy market spooked by $1.5 trillion liquidity crunch

As Europe continues to face a daunting energy crisis, European energy markets are still facing a liquidity disaster, with financial institutions’ exposure to fossil fuels and record levels of margin calls ringing. the alarm. According to Norway Equinor ASA (NYSE: EQNR), European energy trading is under strong pressure from margin calls at least $1.5 trillion, putting additional pressure on governments to provide more liquidity reserves.

In addition to stoking inflation, the energy crisis is sucking up capital to underwrite transactions in a context of wild price swings. Energy prices have fluctuated over such a wide range that many companies are now struggling to manage margin calls, forcing them to require additional collateral to secure their trading positions while forcing traders to obtain credit lines of several billion euros.

“Cash support is going to be needed. It’s just dead capital tied up in margin calls. is not good for this part of the gas markets,Helge Haugane, Equinor’s senior vice president for gas and power, told Bloomberg. Haugane noted that derivatives trading is where support will be needed, and added that the estimate of 1 $.5 trillion is actually a conservative estimate.

A report by the Brussels NGO Financial watch reveals that the world’s 60 largest banks have fossil fuel exposures of approximately $1.35 trillion, with more than half of that total exposure on the books of Asian banks. However, the report notes that the 22 European banks featured in the analysis account for $239 billion in credit distributed to fund fossil fuel-related activities, with North American banks carrying a comparable amount.

Related: US Prepares Response to OPEC+’s ‘Short-Sighted’ Strategy

Finance Watch also calculated the additional capital these banks would need to properly account for the risk of these fossil fuel exposures becoming stranded assets. The report says that although EU and North American banks have roughly the same amount of fossil fuel exposures, EU banks would need significantly more capital to cover the risk. because they are backed by much less equity.

But will European banks be able to step up? Finance Watch argued that banks should back fossil fuel exposures with additional capital. The NGO recommends a risk weighting of 150%, which means that each loan granted to companies for existing activities related to fossil fuels should be backed by 12% of the capital.

In September, the European Banking Authority (EBA) sent a reply to the European Commission regarding the current high levels of margin calls and excessive volatility in European energy markets. The European Commission had asked the European Banking Authority (EBA) to consider, among other issues, ”…any other possible measures to minimize the liquidity problems currently facing energy companies, including ways to improve the transparency, volatility and predictability of margin calls, especially intraday.

To which the ECB’s response was:

The EBA has not identified any potential changes to the prudential framework that could effectively contribute to mitigating the current situation. This reflects the fact that most of the binding constraints that the EBA has identified derive from existing internal risk management limits and constraints decided by banks and/or central clearing counterparties (CCPs) due to their risk appetite. for risk and sustained business flows with clients and counterparties. Banks are, however, faced with large liquidity draws, including in USD, in some cases at fairly short notice in the event of large market movements. Efforts for more transparency around margin calls would therefore be welcome..”

It seems that more European countries should follow the German way with governments intervening directly with grants and other relief measures, which has not gone down well with many of its neighbors.

Fossil fuel exposure from major banks in Europe and North America


United Response

About a week ago, the German government announced that it would abandon previous gas tax plans for consumers and that it introduce a fuel price cap to curb soaring energy bills, with German Chancellor Olaf Scholz establishing a 200 billion euro ($194 billion) ‘defensive shield’ to protect businesses and consumers from the impact of soaring oil prices energy.

“The German government will do everything in its power to bring [energy] falling price. We are now putting in place a large defensive umbrella … which we will provide with 200 billion eurosn,” Scholz said at a press conference in Berlin, which he attended virtually due to a Covid-19 quarantine.

So far, Germany has put in place the largest program in Europe to support companies affected by the energy crisis, put aside 7 billion euros in loans to be made available to companies facing liquidity problems. german energy giant Uniper SE requested an additional €4 billion after fully drawing on an existing €9 billion facility, while Austria extended a €2 billion credit to cover the commercial positions of the municipal electricity company of Vienna. Meanwhile, Finland and Sweden have announcement a $33 billion emergency liquidity facility to utilities through loans and credit guarantees.

But not everyone is happy with Germany’s massive donations to energy companies.

French Finance Minister Bruno Le Maire as well as Italian Prime Minister Mario Draghi did not throw a punch, warning that such a move increases the risk of eurozone fragmentation.

On Wednesday, Commission President Ursula von der Leyen echoed the criticism, “To avoid serious fragmentation, we need a united and common European response. We must preserve fair conditions of competition, without distortions of the single market and act together in a spirit of reinforced solidarity,she wrote in her letter to EU leaders ahead of the Prague European Council, implying that the generous subsidies would disadvantage the rest of Europe.

Meanwhile, French and Italian commissioners Thierry Breton and Paolo Gentiloni have called for a pan-European response in a editorial published in newspapers.

The German government has previously rejected a joint EU fiscal response, which might be understandable given Europe’s largest economy’s heavy reliance on Russian gas.

By Alex Kimani for

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