European power companies are staring down $1 trillion in payments. Top experts explain why this might not be a Lehman moment for Europe.
You may have read recent comparisons between Europe's energy crisis and the Lehman Brothers collapse.
Two experts told me this weekend that the analogy is only fitting in the sense that it's a systemic risk with a massive amount of money involved, but there's a key difference.
In 2008, Lehman Brothers had effectively boosted the value of nearly worthless securities to such an extent that when the bubble popped, catastrophe ensued even as the US government orchestrated a bailout for the banks (though not for Lehman).
So Europe's present crisis is a Lehman moment in the sense that the government is stepping in to avoid a systemic collapse — though not in the sense that utility companies were speculating, shorting, or providing empty goods.
Make sense?
Let's dive deeper.
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1. European utility companies that hedge their sales with futures contracts are facing a $1 trillion crunch since escalating power prices have pushed collateral requirements soaring.
The size of these margin calls are far above what otherwise healthy power companies can stomach.
Kristian Ruby, secretary general of power industry at Eurelectric, told me it isn't the fundamentals of these companies that are flawed.
"It's the situation that's rotten that's been triggered by a targeted attempt to disrupt the market," Ruby explained.
Think back to Lehman Bros — the subprime mortgage boom leading up to 2008 had saddled banks with toxic assets. The investment bank had to file for bankruptcy after talks of a rescue fell through.
Some European governments are already moving to provide liquidity for the energy sector, and power companies will be able to pay those debts back because they still have millions of paying customers.
"We're not going to see a bubble of fake value explode [like Lehman Brothers], but we could see nasty consequences with healthy companies having to go bankrupt if this isn't handled well," Ruby added.
Tim Gramatovich, chief investment officer at Gateway Credit Partners, told me something similar: Utility firms weren't doing anything wrong, but they were in the wrong place at the wrong time.
"These companies followed their rules, they weren't speculating or shorting gas," he told me over the phone Friday.
"These are monster numbers. Nobody really knows how much money, or the length of the challenge. There's a war premium and risk premium embedded in the energy markets, but no one knows that number."
What do you expect the European governments to do next? What does an intervention look like? Email prosen@insider.com or tweet @philrosenn.
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Curated by Phil Rosen in New York. (Feedback or tips? Email prosen@insider.com or tweet @philrosenn).
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.