TOKYO – Asia is seeing ghosts again. A show among tight credit markets dates back to the 2007-2008 global financial crisis. Another comes from 1997-98, when Asia’s debt-fueled growth boom ended disastrously.
Economists can debate which comparison is more relevant at the moment. But the answer may very well be like Consequences of the war in Iran and the rise of artificial intelligence collide at an inopportune moment.
Possible parallels 2007-2008 are in all media. The turmoil roiling private credit markets bears little resemblance to the subprime crisis that gripped Wall Street nearly two decades ago.
The cracks in this hidden corner of $1.8 trillion in finance have clear echoes of the subprime crisis. Liquidity is tight, or drying up altogether. Uncertainty about how assets are valued appears to be exacerbating investor concerns and fueling increased buybacks.
That, in turn, has observers worried about the ripple effects on the broader public securities markets.
The plot thickened on March 6 when the world’s largest asset manager, BlackRock, with $14 trillion in assets, announced it would limit redemptions from one of its major debt funds. This followed the experience of rival Blackstone a record number of redemption requests.
The move came weeks after alternative asset manager Blue Owl prevented investors from withdrawing money at intervals previously allowed. BNP Paribas has frozen repayments on some of its securitized debt funds.
Deutsche Bank scored $30 billion exposure with private loans. But the financial giant admits it may face indirect challenges through its counterparties and linked portfolios.
“The red flags we’re seeing today in private loans are remarkably familiar to those of 2007,” Orlando Gemes, chief investment officer of Fourier Asset Management, told Bloomberg.
Earlier this week, JPMorgan China tightened lending to private credit funds. It also marked down the value of some loans in its portfolios, highlighting how hiccups are spreading in the private loan industry.
There are also new forces at play. One is how artificial intelligence is changing key economic sectors in real time.
“Market focus on the risk of AI-related disruption in software has intensified across the board PUBLIC and private markets,” wrote analysts at BMI, a unit of Fitch Solutions. “Private equity sponsors and private credit lenders have significant exposure to the sector, with underwriting in software pieces backed by acquisitions often tied to recurring revenue and growth assumptions rather than asset backing or established profit margins.”
BMI notes that “we believe the impact on banks is likely to be limited because most of this activity resides outside the banking sector. However, private markets are less transparent and less liquid, which can make any changes in pricing or risk appetite more sudden.”
All of this is reminding global markets of the oft-quoted JPMorgan CEO Jamie Dimon MONITORING last October, when hidden loans at auto parts supplier First Brands rattled Wall Street: “My antenna goes up when things like this happen. And maybe I shouldn’t say this, but when you see one cockroach, there’s probably more… Everybody needs to be warned about this.”
The question for Asia is how many cockroaches can run under the surface. Those risks are growing as the coming spike in inflation from the war in Iran roils global debt markets. And while major economies from the US, the Eurozone and Japan face the risk of stagnation.
“The risk of a 1970s scenario is growing,” notes Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management. If there is a protracted war that raises oil prices significantly further, he adds, “then the safe-haven status of government bonds is at risk, and with it, all assets.”
This has made Warren Buffett trending on social media. That is, it appreciates the famous investor’s observation that “only when the tide goes out do you find out who has been swimming naked.” As the flow of global capital fades, there are growing concerns about how much funding will be found at the bottom.
This has led economists such as Mohamed El-Erian at Allianz to warn that chatter around the private loan market suggests a “classic contagion phenomenon” may be rife.
Wall Street veteran George Noble, a longtime Fidelity fund manager, warns that “we’re watching a financial crisis unfold in real time. The last time funds started blocking investors from getting their money back. Bear Stearns collapsed six months later.”
“After 2008, regulations pushed risky lending out of banks and into private credit,” notes Noble. “The sector grew to $3 trillion. But these funds give five to seven year loans while promising investors quarterly liquidity.”
Asked about parallels with 2008, Lloyd Blankfein, former CEO of Goldman Sachs, tells Bloomberg that “it smells like a moment again, I don’t feel the storm, but the horses are starting to neigh in the corral.”
Asia’s export-led and dollar-dependent economies will be on the front lines of any contagion from US credit markets. And from the strong dollar, which brings us to why the ghosts of 1997 and 1998 are suddenly haunting Asia.
A side effect of the US-Israeli-led Iran war is that dollar-crushing trends are bursting onto the scene again. Despite the fact that the US national debt is approaching 39 trillion dollars and high inflation, and President Donald Trump’s tariffs, the dollar is rising against all odds. This may be a clear and present danger for Asia’s 2026.
Past episodes of extreme dollar strength have not gone well for the most dynamic economic region. The most obvious example was the Asian financial crisis of 1997-1998. This account had its roots in the 1994-1995 Federal Reserve tightening cycle. At that time, the Fed doubled short-term interest rates in just 12 months. The resulting rise in the dollar made it impossible to maintain Asia’s currency pegs to the dollar. The first Thailand was devalued in July 1997. The next Indonesia. Then South Korea.
Other episodes include Fed 2013 “conical rage.” The turmoil prompted Morgan Stanley to publish a “fragile five” list that no emerging economy wanted to be on. Original group: Brazil, India, Indonesia, South Africa and Turkey.
Now, a stubbornly strong dollar is once again complicating Asia’s development plans. History’s greatest magnet is luring capital from every corner of the globe, amassing the wealth needed to finance budget deficits, hold bond yields steady and prop up stock markets.
It’s clear that Trump won’t like this dynamic, as Asia’s two major currencies are trending lower against a strong dollar. Trump, after all, has been trying to weaken the dollar for years — an effort that has him trying to end the Federal Reserve’s autonomy to make its own rate decisions.
Artificial intelligence and the disorientation surrounding it add to these vulnerabilities across Asia. As Moody’s Analytics notes in a report, “the conflict in the Middle East has sent shockwaves through Asian stock markets, exposing uneven vulnerability across the region, with South Korea seeing the biggest sale. The strike followed a strong, AI-driven rally that had left the technology-heavy markets of South Korea and Taiwan highly-rated, leaving them acutely exposed to a sudden shift in risk appetite.
The Iran conflict, Moody’s argues, “triggered macro and financial changes that are weighing hardest on the very economies where AI optimism had recently boosted ratings to extended levels.” And “while the initial shock may subside, market volatility looks set to remain elevated.”
These risks are exacerbated by the ways in which a rising dollar could attract huge waves of capital from Asian assets. One concern that Asian exchange rates are under downward pressure is that offshore debt may become harder to service. Then there is what can happen with the so-called “being trade”.
Japan’s zero interest rate policy since 1999 has turned it into the world’s leading creditor nation. For decades, investment funds borrow at a low price in yen to bet on the highest yielding assets around the globe. As such, you are suddenly moving slam markets almost anywhere. It became one of the globe’s most crowded trades, one uniquely prone to correction.
At the same time, Japanese Prime Minister Sanae Takaichi has called for a weaker yen. This includes pushing the Bank of Japan to rein in rate hikes and quantitative easing. The slightest hint of exchange rate manipulation by Tokyo could prompt Trump to threaten Japan with new trade restrictions.
There is no telling how a weaker yen might play out in Beijing. As China’s growth slows and deflationary pressures abound, a weaker yuan could go a long way to reviving Asia’s largest economy.
In the meantime, problems in the US credit markets and inflationary threats from Iran was they are putting Asia in the center of the collateral damage zone. And forcing policymakers across the region to heed the dire lessons of 2007, 1997 and beyond.
Follow William Pesek on X at @WilliamPesek
