Central bank governor ties Iran turmoil to private credit woes and suggests ‘double whammy’ could be ahead
Bank of England governor Andrew Bailey has said the Iran war risks worsening the multitrillion-dollar private credit crisis and spilling over into a wider economic meltdown.
Bailey highlighted a potential “double whammy” for the global economy caused by growing private credit strain and financial market volatility from the US-Israel-Iran conflict.
He told the European Parliament’s Committee on Economic and Monetary Affairs in Brussels on Thursday that decisionmakers needed to stay “very focused” on that dual risk even amid a fragile truce in the Iran conflict this week.
“We’ve got volatile markets,” he said. “What if that… coincides with one of these other things – let’s say private credit – becoming a much bigger problem?”
Bailey, who was speaking in his capacity as chair of the International Financial Stability Board (FSB), has previously mentioned the growing risk of a 2008-style market meltdown because of turmoil in the private credit market.
In October, he told a House of Lords committee that it remained an “open question in the US” whether the implosions of subprime auto lender Tricolor and auto parts manufacturer First Brands reflected a deeper problem for the US economy or were simply confined to private finance.
And on Thursday, he suggested wider problems may be emerging in the private credit space. The sector, he said, “has not yet, because of its relative newness, actually come under stress. We may be seeing that now.”
He said the sector, whose size expanded to about $3 trillion by 2025, according to Morgan Stanley, was “relatively opaque,” and that doubts about the space could spiral into wider challenges.
“There is a risk that when investors start to observe more of these instances [of financial failures], it begs a bigger question about their confidence in the system as a whole,” he said.
Prominent voices including JPMorgan chief executive officer Jamie Dimon have also expressed scepticism about the health of the private credit system. In October, Dimon described “cockroaches” at play in the sector and said it could see problems beyond the Tricolor and First Brands meltdowns.
“When you see one cockroach, there are probably more,” he said.
The outbreak of war in Iran at the end of February has roiled financial markets and sent oil prices sharply higher, sparking fears of a global recession and potentially delivering a sizable blow to the UK economy.
The US-Iran ceasefire wobbled on Thursday as Israel stepped up its attacks on Lebanon and the Strait of Hormuz, a crucial oil shipping route, reportedly remained closed.
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