Europe’s Energy Market Has Been Weakened by a $1.5 Billion Liquidity Crisis | Whuff News


As Europe continues to face a dire energy crisis, European energy markets are still facing a financial crisis, with financial institutions exposed to fossil fuels and record levels of margin calls ringing alarm bells. According to Norway Equinor ASA (NYSE: EQNR), the European energy market is under heavy pressure with borderline calls at least $1.5 trillion, putting additional pressure on governments to provide liquidity buffers.

Apart from inflation, the energy crisis absorbs capital to ensure trade amid price volatility. Energy prices have fluctuated over such a wide range that many firms are now struggling to manage margin calls, causing them to require additional collateral to secure trading positions while forcing traders to secure multi-billion euro credit lines.

“Liquidity support will be needed. This is just dead capital and tied to margin calls. If companies have to put more money, it means that the sale of goods in the market ends and this is not good for this sector. in the gas markets,“Helge Haugane, Equinor’s senior vice president of gas and energy, told Bloomberg. Haugane noted that derivatives trading is where support will be needed, and added that the estimate of $1.5 trillion is actually conservative.

A report by a Brussels-based NGO Financial Overview reveals that the world’s 60 largest banks have fossil fuel holdings of ~$1.35 trillion, more than half of which is on the books of Asian banks. However, the report notes that the 22 European banks shown in the analysis account for $239 billion in credits given to support fossil fuel projects, and North American banks hold the same amount.

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Financial Watch also calculated how much extra money these banks would need to properly report on their exposure to fossil fuels if they became a commodity. The report says that although EU and North American banks have the same amount of exposure to fossil fuels, EU banks will need more capital to cover the risk because they are backed by much less equity.

But will European banks be able to step up to the plate? Financial Watch has argued that banks need to offset fossil fuel exposure with additional capital. The NGO advocates a risk weighting of 150%, which means that all loans given to companies with existing fossil fuel operations will have to be backed by 12% of capital.

Back in September, the European Banking Authority (EBA) he issued an answer to the European Commission regarding the current high rates of border calls and extreme volatility in European energy markets. The European Commission has asked the European Banking Authority (EBA) to consider, among other questions, ”…and any other possible measures to reduce the current payment challenges faced by energy companies, including ways to improve the transparency, flexibility and predictability of border calls, especially intraday.’

To which the ECB’s response was:

The EBA has not yet identified any possible changes to the prudential framework, which would effectively help mitigate the current situation. This shows that most of the binding constraints identified by the EBA arise from existing internal risk management limits and constraints imposed by banks and/or counterparties (CCPs) due to their risk appetite and business continuity. customers and parties. Banks, however, face large withdrawals–including in USD–in some cases at very short notice when there are significant market movements. Efforts to provide transparency about borderline calls would therefore be welcome.”

It seems that many European countries may need it go the German way by governments directly intervening with subsidies and other forms of assistance, which has not gone down well with many of its neighbors.

Fossil Fuel Exposure of Top Banks in Europe and North America

Source: Euactiv

Unified Response

About a week ago, the German government announced that it would abandon previous plans for a gas tax on consumers and instead introducing a gas price cap to curb rising energy bills, with German Chancellor Olaf Scholz setting up a $200 billion ($194 billion) “protective shield” to protect companies and consumers against the impact of rising energy prices.

“TThe German government will do everything in its power to deliver [energy] prices are down. Now we are putting up a big defense umbrella… which we will give 200 billionn,” said Scholz at a press conference in Berlin, which he attended due to Covid-19 quarantine.

To date, Germany has introduced Europe’s largest scheme for recovering companies affected by the energy crisis, to put aside 7 billion euros in loans to be made available to companies facing insolvency issues. Germany’s powerhouse Uniper SE has sought an additional 4 billion euros after fully utilizing the existing facility of 9 billion euros, while Austria extended 2 billion euros in credit to cover the commercial positions of Vienna’s power utility. At that time, in Finland and Sweden there were announced $33 billion in emergency debt relief for utility services through loans and credit guarantees.

But not everyone is happy about Germany’s massive support for energy firms.

French finance minister Bruno Le Maire and Italian Prime Minister Mario Draghi pulled no punches, warning that such a move increases the risk of a breakup of the eurozone.

On Wednesday, Commission president Ursula von der Leyen criticized, “To avoid major fragmentation, we need a united and uniform European response. We must maintain a level playing field, without distorting the single market and work together in a spirit of strengthening unity,” he wrote in his letter to European leaders before the European Council in Prague, explaining that subsidies would put the whole of Europe in trouble.

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

The German government has previously rejected a normal fiscal response by the EU, which is understandable given how dependent Europe’s largest economy is on Russian gas.

By Alex Kimani of Oilprice.com

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