Aurelia Butler

BERLIN/FRANKFURT (Reuters) -Germany triggered an emergency plan to manage gas supplies on Wednesday that could see Europe’s largest economy ration power if a standoff over a Russian demand to pay for fuel with roubles disrupts or halts supplies.Moscow’s insistence on rouble payments for Russian gas that has met a third of Europe’s annual energy needs has galvanised other European states: Greece called an emergency meeting of suppliers, the Dutch government said it would urge consumers to use less gas and the French energy regulator told consumers not to panic.The demand for payment in roubles, which has been rejected by G7 nations, is in retaliation for the West imposing crippling sanctions on Russia for its invasion of Ukraine.Moscow, which calls its actions in Ukraine a “special military operation”, says Western measures amount to “economic war”.The Kremlin signalled on Wednesday it could widen the demand for rouble payments to other commodities including oil, grain, fertilisers, coal and metals, raising the threat of recession in the United States and Europe where inflation is already skyrocketing.Berlin’s unprecedented move is the clearest sign yet that the European Union is preparing for Moscow to cut gas supplies to the region unless it gets payment in roubles. Italy and Latvia have already activated warnings.Moscow is expected to unveil its plans for rouble payments on Thursday, although said it would not immediately demand that buyers pay for gas exports in the currency.Germany Economy Minister Robert Habeck activated the “early warning phase” of an existing gas emergency plan meaning that a crisis team from the economics ministry, the regulator and the private sector will monitor imports and storage.Habeck told a news conference that Germany’s gas supplies were safeguarded for now but he urged consumers and companies to reduce consumption, saying that “every kilowatt hour counts”.”We must increase precautionary measures to be prepared for an escalation on the part of Russia,” said Habeck. If supplies fall short, Germany’s network regulator can ration gas supplies, with industry being first in line for cuts. Preferential treatment would be given to private households, hospitals and other critical institutions.Even without the threat of gas shortages, Germany is at risk of recession as exploding energy costs have hammered industry, forcing some steel producers to curtail production. The government’s council of economic advisers on Wednesday more than halved their growth forecast for this year to 1.8%. {nL2N2VX1PL]Half of Germany’s 41.5 million households heat with natural gas while industry accounted for a third of the 100 billion cubic metres of national demand in 2021.’EVERYTHING WILL BE FINE’Russia is Germany’s top gas supplier, accounting for 40% of imports in the first quarter of 2022. Berlin has pledged to end its energy dependency on Moscow but it will not achieve full independence before mid-2024, according to Habeck.Europe was facing an energy crunch even before Russia invaded Ukraine, with gas storage levels in the EU now at about 26% of total capacity, below normal levels at this time of year.The EU Commission, which said on Wednesday it would work closely with member states to prepare for any gas shortages, has proposed legislation requiring countries to fill levels to at least 80% by November but that would be almost impossible if Russia halts supplies.”It is not possible to build stocks this year and curtail Russian flows,” said Joel Hancock, vice president of commodities research at Natixis.Jean-François Carenco, head of the energy regulator in France, which is far less reliant on Russian gas than Germany, said the country should not encounter any supply issues.”Everything will be fine, the gas storage facilities are well filled, we’ll make it through the winter,” he told BFM TV.Greece was set to hold an emergency meeting of its energy regulator, gas transmission operator and its biggest gas and power suppliers on Wednesday to assess its supply security in case Russia stops supplies.The Dutch government said it would launch a campaign to get consumers to use less gas.Investors are watching with growing concern to see how the dispute over Russia’s insistence on rouble payments play out as consumers in Europe grapple with exploding energy prices that have forced governments to announce fiscal relief measures.”Gas markets are still anxious in expectation of clear rules of roubles payment by Thursday,” said Rystad Energy senior analyst Vinicius Romano. “Both sides remain at odds over the prospect, of changing the currency terms of dollar and euro contracts, waiting for the other side to blink first.”After Germany’s announcement, German year-ahead wholesale electricity set a three-week high of 185 euros per megawatt hour, up 6.3%..Kerstin Andreae, head of the Federal Association of the Energy and Water Industry (BDEW), said Germany should have clear plans in place laying out how the government would deal with a gas delivery stoppage that force rationing measures.”We must now take concrete measures to prepare for the emergency level, because in case of a stoppage things would have to move fast,” Andreae said. 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Leveraged transactions (LT) have grown to a 500 billion-euro-pile on the books of the euro zone’s 28 largest lenders from 300 billion euros in 2018 as record-low interest rates made banks seek returns in riskier parts of the market. In a letter to the chief executive offiers of the 115 banks on his watch, the ECB chief supervisor Andrea Enria said lenders should tighten their controls on this type of business and ease up on the riskiest deals, known as ‘highly leveraged transactions’ (HLT).He also criticised banks’ cavalier attitudes towards these loans, saying many had not even set a cap on HLTs, or if they did, it was too permissive.This posed a risk to the sector at a time when the economy was slowing due to the war in Ukraine and interest rates were expected to rise to fight surprisingly high inflation. “High levels of LT exposure on banks’ balance sheets leave them vulnerable to renewed shocks, which could arise from unexpected and sharp economic slowdowns or higher than expected interest payments,” Enria said in the letter https://www.bankingsupervision.europa.eu/press/letterstobanks/shared/pdf/2022/ssm.2022_letter_on_leveraged_transactions.en.pdf?1dd5c0299bf7b93080e4b383bccb023c. More

FRANKFURT (Reuters) -Europe’s economy is increasingly strained by Russia’s war in Ukraine as growth stalls, confidence plummets and inflation soars, data and warnings from policymakers made clear on Wednesday.Sanctions on Russia following its invasion last month have pushed energy prices to record highs across the continent, sapping confidence and raising the risk of another recession, even before some states have recovered from a COVID-fuelled downturn.Germany, the bloc’s biggest economy and one of the most reliant on Russian energy, will be among the hardest hit and the government’s council of economic advisers on Wednesday more than halved their growth forecast for this year, to 1.8%.”The risk of a recession is substantial,” Volker Wieland, one of the panel’s members said, adding the economy would now take until the third quarter to return to its pre-pandemic size. The advisers, whose forecasts guide the government in setting fiscal policy, also predicted that German inflation would double to over 6%.As the government triggered an emergency plan for possible gas rationing should supplies from Russia be disrupted or stopped, Wieland said Germany should work to end its dependence on Russian energy, possibly through a longer-than-anticipated nuclear energy programme.This would push up inflation for now but improve the long-term security of the country and the economy’s stability, he said.European Central Bank President Christine Lagarde also warned that, as the conflict drags on, Europe’s economy could suffer more than feared just a few weeks ago.”The longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios,” she said in a speech. In Vienna, Austria’s central bank cut its growth forecast and sharply raised its inflation outlook for this year, saying its new predictions would worsen further if the war dragged on.STAGFLATION DILEMMALagarde said households were already becoming more pessimistic and businesses could soon be postponing investment. Her warning was underlined by a sentiment indicator that showed the war had sent consumer confidence in the euro zone plummeting and inflation expectations to record highs.The European Commission’s economic sentiment index dropped to 108.5 in March from a downwardly revised 113.9 in February, while consumer confidence plunged to -18.7 from -8.8. The biggest hit to confidence came from inflation, which is sapping consumer spending power, even as governments quickly roll out subsidies to ease some of the pain. In Spain, one of the bloc’s biggest economies, inflation accelerated to 9.8% in March, the fastest pace since May 1985, from 7.6% in February.German price growth meanwhile soared past expectations to hit 7.6%, a level not seen since the early 1980s, suggesting that the euro zone reading on Friday is almost certain to exceed economists’ 6.6% forecast. “Those inflation numbers were absolute whoppers, big big upside surprise to the numbers,” Chris Scicluna, head of research at Daiwa Capital Markets, said. Stagnating growth coupled with high inflation – stagflation in economic jargon – leaves Lagarde’s ECB in a dilemma.While the central bank would normally tighten policy to fight inflation, such a move could exacerbate a recession, hurting consumers even more.To mitigate the risk, Lagarde promised to move only by small increments, without making longer-term commitments. “Gradualism means that we will move carefully and adjust our policy as we receive feedback on our actions,” she said.This policy dilemma could in turn divide the ECB’s rate setting Governing Council even more, as conservatives are already calling for a hike to combat high inflation. “Unless … the war …becomes a global conflict, then I think that the first rise (of rates) could come towards the end of this year,” ECB policymaker Peter Kazimir said. More

The advisers, whose forecasts guide the German government in setting fiscal policy, cut their 2022 economic growth forecast to 1.8% from 4.6%, adding output would not reach its pre-pandemic level before the third quarter of the year.In 2023, Germany’s gross domestic product should grow by 3.6%, the four advisers said.”We haven’t tried to calculate the exact probability of a recession,” council member Volker Wieland told a news conference.”For example, we don’t know if there will be a supply freeze or whether the West can no longer avoid imposing an energy embargo. But these are possibilities. So, the risk is substantial,” Wieland said.He added that unlike the U.S. economy, Germany still had not fully recovered from the coronavirus pandemic.The advisers said Germany was on track for further economic recovery before Russia invaded its neighbour on Feb. 24.”The Russian war of aggression against Ukraine has now drastically worsened economic conditions,” they said in a statement.The war further frayed supply chains that had already been strained due to the COVID-19 pandemic, and a surge in natural gas and crude oil prices hurt companies and private consumption, they said.The council forecast inflation to reach 6.1% in 2022 before easing to 3.4% next year.A potential escalation of the conflict and additional sanctions could have a significantly greater impact on the German and European economies, the experts warned.”We have to change course and use all levers to become less dependent on Russian raw material supplies,” Wieland told Reuters, adding he favoured extending the life of German nuclear power plants.The country’s three remaining nuclear power plants are scheduled to be shut down by the end of the year, and the government has so far vehemently opposed extending their life-span as a way of reducing its reliance on Russian gas. More