European energy markets face $1 trillion funding crisis – 2 analysts explain why this doesn’t mirror Lehman Brothers crisis.

  • Europe’s worsening energy crisis has left utility companies facing massive margin calls that some estimates top $1 trillion.
  • Two experts explained the dilemma to Insider and shared what the government could do to step in and help.

Russia’s cuts to Europe’s natural gas supply have raised fears of a ‘Lehman Brothers moment’ for the energy sector, but analysts point to key differences from the bankruptcy that triggered the crash 2008 financial.

Escalating electricity prices have skyrocketed collateral requirements for energy companies that hedge their sales in futures markets. Estimates of these margin calls exceed $1 trillion, more than sane utilities can afford.

“It’s not the fundamentals of these companies that are flawed,” Kristian Ruby, general secretary for the electricity industry at Eurelectric, told Insider. “This is the rotten situation that was triggered by a targeted attempt to disrupt the market.”

In contrast, the subprime mortgage crisis nearly two decades ago burdened banks with toxic assets. For Lehman Brothers, it triggered a bankruptcy filing after talks to stage a bailout broke down.

Today, some European governments are already taking steps to provide liquidity to the energy sector. And power companies will be able to repay those debts because they still have millions of paying customers and a recent track record of profits, Ruby said.

“We are not going to see a false value bubble burst [like Lehman Brothers]but we could see nasty consequences with healthy businesses facing bankruptcy if not handled well,” he said.

The Lehman Brothers analogy isn’t accurate because the nature of the crisis is different, Ruby added, though he recognized it as a useful way to get lawmakers to take immediate action.

Businesses are reeling due to Vladimir Putin’s deliberate cut in supplies, he explained, and EU governments must extend lines of credit to utilities caught in the pinch.

“No sane company has an insane amount of money [for margin calls] this may explain Putin manipulating the market,” Ruby said.

Tim Gramatovich, chief investment officer at Gateway Credit Partners, echoed Ruby’s take. He said it’s not that the utility companies are speculating or selling gas, but they’re nonetheless the ones who stay with the bill if the government doesn’t subsidize their costs.

A Lehman Brothers moment would happen if a government allowed a power company to shut down, but that’s not happening, he added.

“Governments will intervene and already do,” Gramatovich told Insider.

Still, European policymakers must decide whether to subsidize consumers or utility companies, Gramatovich noted. And the final bill is not yet clear.

“These are monster numbers,” he said. “No one really knows how much money is involved, or how long the challenge will last. There is a war premium and a risk premium built into the energy markets, but no one knows that number.”

Michael J. Birnbaum