InvestorQ : Why has Germany been warning the world that Europe could be facing the Lehman moment all over again? What does that mean?
Rutuja Nigam made post

Why has Germany been warning the world that Europe could be facing the Lehman moment all over again? What does that mean?

2 months ago

According to senior officials in Germany, the big risk could come from Russia cutting off gas supplies to Germany in particular and the EU in general. Here is why Germany sees a clear risk of that happening.

a) The warning has come from none other than the German Minister for Economic Affairs; Robert Habeck. He has cautioned the world and also Russia that if gas supplies to EU were cut further, Germany and the world markets could face a Lehman moment.

b) Unlike the Lehman fiasco which was all about the pile of toxic assets in sub-prime mortgages, this is more about gas supplies from Russia. Habeck warned that Germany was near security level supplies and any major disruption could carse ripples across the energy markets globally, not just in Europe.

c) Things had been normal till the time the EU had not agreed to support the US and UK from December 2022 onwards. To begin with, gas supplies from Russia to Germany along Nord stream 1 pipeline started drying up from 14th of June. Nord Stream 1 was supposed to be the pivotal route to one of the largest Russian gas consumer.

d) The problem for Germany and the world is that if supply continued to fall, prices would shoot up. In fact, when Nord Stream 1 started drying up, the price of gas spiked by 24% in a few days-time. Obviously Russia is not happy with the approach of the EU members, especially when their dependence on Russian oil and gas is so high.

e) The irony is that Russia has found willing buyers for its oil in China as well as India, and both are lapping up cheap fuel at an unprecedented pace. In Germany consumers and businesses have been asked to cut down on gas usage. The reality is that Germany’s dependence on Russia for gas is to the tune of 40% of its needs.

f) For now, German government has not allowed higher costs to be passed on to customers as it would trigger inflation and social unrest. The reason Habeck apprehends a Lehman moment is because another spike in gas prices could result in contract related defaults and trade funding could dry up, exactly what happened in Lehman case.

g) Habeck warns that the entire cycle could snowball at very short notice. The moment we see lot of toxic positions and trade defaults, funding lines for them dries up. When funding lines dry up, then the clearing banks stop clearing the trades and that is where the typical Lehman moment begins!