Enron Declares Bankruptcy

The sudden and catastrophic downfall of Enron, like many of this year’s financial earthquakes, will hit Europe’s financial markets first. Ripple effects will be felt later, and the continent is hoping they will not swell too violently.

The laying off of Enron’s 5,000 European staff, save a few administrators, is just the very beginning.

The $47.3 billion company counts 30,000 miles of pipeline and numerous power plants among its global assets. Bankruptcy will probably lead to a massive round of sales and, potentially, complicated debt deals.

But not in Europe. Enron’s physical infrastructure is sparse on the continent, where in recent years it has thrived primarily as a trader of power supplies.

Consequences for Europe

Just three European power systems are directly affected, and the company’s plans for them are still undecided.

Enron is the sole owner of Poland’s 116-megawatt Nowa Sarzyna natural gas-fired plant, the first private power project in the country. It also co-owns Italy’s 551-megawatt Sarlux system, which converts residue from the country’s largest oil refinery into synthetic gas, and the 478-megawatt Trakya plant which supplies Turkey’s state power utility.

All three are big in their own countries, but only bite-sized as far as the world’s power giants are concerned.

Trading is where the hottest competition is to be had, if Enron’s bankruptcy goes forward as expected, now that the Texas-based company has fallen out with its potential financial savior, fellow Texas company Dynegy Inc. A planned merger between the two went wrong.

Loss of an innovator

It’s a situation that few foresaw even half a year ago, when Enron’s figures still looked good, market analysts say.

Enron once boomed. In 1999 it introduced the first "e-commerce" trading system for European power. As such, it played a major role in freeing up the market for an industry that was once somewhat obscure and specialized. Meanwhile deregulation standards imposed by the European Union introduced competition to the continent’s power systems.

The new dynamics sent European power prices into a free-fall, dropping in some cases by 60 per cent, and Enron’s trading systems flooded with demand.

Now, just how much of the European trading market is up for grabs is hard to gauge. Enron’s own traders and public relations officers were too flustered to find the figures or do the math Monday, with their telephones ringing non-stop.

Who's hurting

With the bankruptcy announcement, financial institutions started measuring their exposure to debt.

At least two German banks have announced direct exposure. Deutsche Bank forecast a potential loss of "tens of millions," Reuters reported, while Commerzbank’s exposure could run to "a low double-digit million dollar amount."

But Dutch institutions may be hit harder. The financial group ING reported potential loss of $195 million, while ABN AMRO announced it may seek a provision of $98 million to cover assests at risk. Dutch insurer Aegon was even harder hit, with loans out to Enron of an estimated $300 million.

Enron’s loss is yet another shock to European economies that many fear are, like the U.S. economy, slipping into recession.