The wrecking ball: Margin calls, illiquidity and the race for collateral

This week, one of Germany’s biggest utilities was forced to seek €10bn in financing to avoid a cash crunch in the wake of surging energy costs.

The utility company, Uniper is in the fortunate position that its majority shareholder, Finnish power company Fortum, is owned by the Finnish state. Both Fortum and German state-owned investment bank KfW, stumped up all the cash Uniper required.

Uniper is lucky to have such deep pocketed backers. Unprecedented volatility in European energy markets over the past few months has stressed risk management models to breaking point. Other trading entities operating in Europe’s energy markets may be less fortunate.

If someone as big as Uniper feels it is necessary to ensure it’s liquidity arrangements then what does that mean for what comes to pass? It could be quite the wrecking ball. That poses a big risk to investors who are overly exposed to the continent’s carbon market, but also an opportunity for those that can navigate the potential fallout correctly.