Dimon Says Credit Crunch Could Be Worse Than Expected

Source

Korea Economic Daily

Summary

Jamie Dimon said a credit-market squeeze and stress in private credit lending could be much worse than expected in a downturn.
Hidden credit risks exist in the $1.8 trillion private credit market, but they are unlikely to spread into a broader systemic threat.
He also warned that rising government debt could trigger a bond-market crisis, a sharp jump in yields, and a drain in liquidity.

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Private Credit Crowding Could Deepen a Downturn

JPMorgan Chase CEO Jamie Dimon again warned that a pullback in credit markets could be more severe than expected. Wall Street banks reported strong first-quarter earnings, but concerns about the private credit market persist.

At an investment conference hosted by Norway's sovereign wealth fund on April 28, Dimon said the flood of firms into private credit means not all will perform well. “There are more than 1,000 companies in private credit,” he said. “Some may be great, but I can assure you not all 1,000 will be.” Because markets have gone so long without a credit squeeze, he said, the next recession could be much worse than many expect.

Dimon has repeatedly warned about stress in the $1.8 trillion private credit market. Last year, he said that “if you see one cockroach, there are probably more around,” suggesting hidden credit risks may be lurking across the industry. At the time, subprime auto lenders Tricolor Holdings and First Brands, which had raised money through private credit loans, filed for bankruptcy in succession, adding to concerns about deterioration in the market. Even so, he said the problem was unlikely to spread across the broader financial system because the private lending market is not large enough to pose a systemic threat.

He also addressed the economic outlook in light of the war involving Iran. Geopolitical tensions are adding to inflation pressure, he said, but “right now” he is not worried about inflation.

Dimon was more concerned about the bond market. If government debt continues to rise at the current pace, it could trigger a bond-market crisis, he said. Such a crisis would typically send yields sharply higher and drain liquidity from the market. With demand weakening, central banks could be forced to step in as buyers of last resort.

Britain's 2022 gilt crisis is a leading example. As gilt yields surged, the Bank of England rolled out an emergency support program allowing it to buy as much as 40 billion pounds of government bonds to stabilize the market.

Myung-hyun Han, Hankyung.com reporter, wise@hankyung.com