Aftershocks in Europe

Enron Corp. (ENE) may be based in Houston, but its spectacular collapse has had almost as big an impact in Europe as in the U.S. The energy trader's bankruptcy has sent European banks, investors, electricity consumers, and champions of Europewide energy deregulation reeling. And it's not just the energy markets that have been thrown into confusion. Enron was active in a number of other European sectors, including metals and pulp and paper trading. It even owns a windmill manufacturer in Germany. "This was a global company whose collapse will be felt right around the world," says Alessandro Profumo, CEO of UniCredito Italiano.

Profumo should know. Over the last year, the Milan bank loaned Enron an estimated $20 million. All told, European banks have admitted to lending Enron and its subsidiaries more than $2 billion. In addition, analysts calculate, there is up to a billion dollars further exposure in the form of derivatives and trading contracts.

The European bank reported to have the largest loan exposure to Enron--between $500 million and $800 million--is Royal Bank of Scotland. RBS executives aren't talking, but their stock has taken a big hit. Other banks with sizable Enron loan exposure include Britain's Abbey National, France's Credit Lyonnais, and the Netherlands' ABN Amro (ABN). "Enron isn't on the same scale as the Long-Term Credit Management collapse [in 1998]," says Peter Luxton, global economic adviser to Standard & Poor's Corp., "but it still has a huge effect."

In recent days, the scale of that financial damage has become clearer. The result could well be tighter credit for many companies just as Europe's economy softens. Spreads in the corporate fixed income market widened by up to 40 basis points between Nov. 28 and Dec. 5. Adding to the pressure is the fear that there is more risk in the credit markets than was realized. "We didn't know Enron, but lent on the back of its credit rating," says Profumo. As Enron sank, he adds, "the first question I asked my colleagues was: `What is the value of a rating?"' Just a few months ago, the parent company had an AA rating from the main agencies. It's now rated as junk.

Banks aren't the only ones affected. Enron stock and bonds were widely held by European mutual funds and insurers. The lucky ones offloaded their stakes as the extent of the company's problems started to come out. "I knew I had to get out in August, when they canceled a meeting with me at the last minute--after I'd arrived in Houston," says a fund manager at a private German bank. He quickly dumped $50 million of Enron stock. Insurers that still held big blocks of Enron shares when it collapsed include Germany's Allianz, France's AXA, and Holland's Aegon. Analysts estimate Aegon's exposure at $200 million.

Meanwhile, Europe's spot and futures markets for electricity are in chaos. Enron was a big electricity supplier and trader in Europe, at the height of its activity accounting for up to 20% of volume traded on the energy exchanges. Most energy and power companies already had wound down their exposure to Enron by the time its collapse became imminent. But the scale of the company's problems and the speed with which it collapsed have unsettled many traders. Not surprisingly, the price of energy futures is on the way up. Because Enron's aggressive pricing had helped bring down tariffs, businesses and domestic consumers will have to pay more for their energy this winter. Prices will probably rise fastest--up to 2.5%--in Britain's deregulated market, say analysts. Enron was a particularly large player there, producing electricity and delivering it to 2.2 million retail consumers and thousands of companies.

Even more than in the U.S., Enron's woes are likely to increase resistance to energy deregulation. Although Germany and Britain have almost wholly liberalized their markets, progress elsewhere, especially France, has been slow. Opponents of reform will use the Enron debacle to hold up the process. "They're going to make a real meal out of this in Paris," says a European Commission official in Brussels. This American bankruptcy is Europe's headache. By David Fairlamb in Paris

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