The continued escalation of the US-led NATO war against Russia in Ukraine threatens to trigger a financial crisis in European energy markets that could spread more widely and affect banks and others sectors of the financial system.
Over the weekend, the Swedish and Finnish governments announced they were providing emergency aid, amounting to tens of billions of dollars, to energy companies hit by cash flow problems as they face to a tenfold increase in gas prices and violent market fluctuations that are making it increasingly difficult to finance their business operations.
The immediate origins of the move, in which the Swedish government said it would provide up to $23 billion in credit to utility companies, lay in the major powers’ decision to step up sanctions against Russia.
Last Friday, the finance ministers of the G7, made up of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom, agreed that they would continue their efforts to impose a cap on Russian oil prices to reduce Russian government revenue. and “strengthen and amplify the scope of existing sanctions”.
In response, Russia said it was cutting gas supplies through the Nordstream 1 pipeline, saying the sanctions had hampered maintenance work.
There was immediate outcry over the Russian response amid claims that the gas market was “weaponised”, and Moscow’s move was evidence of Russian “cynicism”.
Comments from Swedish and Finnish government ministers as well as industry representatives underscore the breadth and depth of the financial problems that energy companies face because of the way they trade in the gas market.
This involves the use of derivatives in which they try to hedge large price movements for which they must obtain credit from banks and other financial institutions. But the prices have become so high and the movements so violent that the money they have to place with their creditors as collateral has reached such a point that once “normal” operations have ceased.
According to a European trader, quoted by the FinancialTimes (FT): “The amount of money you need to participate in these markets is reaching impossible levels.”
Announcing the move following the decision to close Nordstream 1, Swedish Prime Minister Magdalena Anderrson said the government would provide hundreds of billions of crowns to fund the guarantees that energy producers must post to finance their transactions.
Standing alongside Sweden’s financial regulator, central bank governor and finance minister during his announcement, Anderrson said Russia’s move “not only risks leading to a ‘winter of war’ but threatens also our financial stability”.
The Swedish decision was followed by a tweet from Finnish Finance Minister Annika Saarikko indicating that similar action was underway. “The concern is shared. Similar preparations are underway in Finland,” she said.
This was followed by a press conference led by Finnish Economy Minister Mika Lintilä in which he highlighted the seriousness of the problem which saw the government announce a €10 billion loan and guarantee package. euros.
“Market jitters are high,” he said. “These are all the ingredients of the Lehman Brothers version for the energy sector.” The collapse of the US investment bank in September was the trigger for the global financial crisis.
The comments of energy market players underline the extent of the financial dangers.
Jean Francois Lambert, founder of a commodity trading firm and former head of commodity trade finance at HSBC, told the FT that other countries were likely to intervene in energy markets.
“The crisis is taking the next step. If one of the major energy companies collapses, there is a fear that there will be a domino effect,” he said. “The call for liquidity is so huge that maybe one day we will have a problem that could harm the whole market.”
Speaking in support of the Swedish government’s measures, Stefan Ingvfes, governor of the country’s central bank, the Riksbank, said: “We need to isolate this in one market so that it doesn’t infect the financial sector.”
The crisis is not limited to the Nordic countries but extends to the whole European continent and the United Kingdom.
Lambert said the situation was not yet a financial crisis but indicated it could become one.
“The big banks in Germany, France, Italy and Spain should be able to handle this. But if one of their big customers trapped them in a cash crunch, you could see all the banks pull out,” he said.
The effects of rising gas prices have already been felt. In July, the German government announced a €15 billion bailout for Uniper, Europe’s biggest buyer of Russian gas which is losing tens of millions of euros a day, and the company last month requested 4 billions of additional euros.
Speaking to the FT about Sweden’s move, the country’s finance minister, Max Elger, said: “It’s a problem across Europe… liquidity is a problem in many countries. Other countries may be forced to follow suit.
The crisis is also strongly affecting Great Britain. The deputy director of Energy UK, a trade organization which defends around 100 energy companies, told the FT that UK power producers were “really concerned about the liquidity situation this winter”.
Urging the UK government to investigate and understand the scale of the problems facing businesses, he said: “Fundamentally energy markets are not designed to deal with the scale of market volatility that we have seen in recent months”.
But as the war against Russia escalates and new economic sanctions are applied, the crisis is expected to deepen.
Russia’s top energy official Alexander Novak said the EU was to blame for the gas supply cuts and that if it doesn’t reverse the sanctions, the situation could get worse as prices continue to rise. ‘increase.
“The whole problem is at their end,” he said. “This short-sighted policy is leading to the collapse we are seeing in European energy markets. It’s not even the end, because we are still in the warm part of the year. Winter is coming and many things are hard to predict.
It has been reported that EU energy ministers will meet in an emergency meeting on Friday to discuss their response to the crisis under conditions where an electricity official has warned it will only take “a few days for not only the small but the large generators” to collapse because of liquidity problems.