EU commissioner for Energy Estonia’s Kadri Simson speaks during a joint press conference with Minister of industry and trade of the Czech Republic Jozef Sikela as part of a meeting of EU energy ministers to find solutions to rising energy prices. AFP.
EU commissioner for Energy Estonia’s Kadri Simson speaks during a joint press conference with Minister of industry and trade of the Czech Republic Jozef Sikela as part of a meeting of EU energy ministers to find solutions to rising energy prices. AFP.
Current record high power prices in Europe are no longer tenable to the man on the street. Volatile energy prices have resulted in a liquidity squeeze in what some call a “Lehman Brothers” moment for electricity generators if banks do not step in to provide emergency funding. Significant collateral demands are increasingly required from power companies who need their credit lines to be extended.
The 9 September 2022 meeting by energy ministers in the European Union (EU) have revealed four likely measures in the form of “emergency intervention”, including:
This may alleviate the current situation but it will take time to rethink the entire system – a complex one that split the electricity grid from power generation and delivery while attaching an emission permit market. Prior to that, uncertainties are likely to persist as different countries seek to arrive at a consensus. In the meantime, any quick fixes the EU takes also has to consider the possibility of further retaliatory measures from Russia in their decisions. Worries from the energy crisis and its knock-on implications for growth have intensified with Russia switching off the Nord Stream 1 pipeline completely at the start of this month.
Looking ahead, while efforts and discussions amongst various Eurozone policy makers continue in an attempt to limit the negative impact of elevated natural gas and power costs on the balance sheets of more energy-intensive industries and/or utilities companies which could provide some relief, the final impact on individual companies will likely differ and take time to pan out although broad inflation risks in the region still look skewed to the upside. At the same time, market worries over the risk of over-tightening by central banks to combat inflation and potential for a deeper prolonged recession in a worse-case scenario suggests further negative implications for the Financials sector down the road.
For EU Financials, countries with more direct exposure to Russian gas imports such as Germany and Italy appear more exposed to macro risks, although vulnerabilities appear to have extended to the UK and broader Europe which underscores our cautious stance on the region. At this point, there is limited clarity on the extent of a potential macro-driven increase required in banks’ future loan loss provisions, which will also depend on the supportive actions from governments, as the provision of credit lines/guarantees to limit liquidity issues in some cases could help to limit asset quality risks. With limited visibility at this point as banks do not typically provide detailed or standardised disclosures of their loan book exposures, increased macro uncertainties are expected to remain as an overhang on the sector. We retain a cautious stance on the sector and believe it is prudent to reduce exposures pending further visibility.
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