TOKYO \u2014 Asia is seeing ghosts again. One apparition amid tight credit markets dates to the 2007-2008 global financial crisis. Another comes from 1997-98, when Asia\u2019s debt-fueled growth boom ended disastrously.<\/p>\n
Economists can debate which comparison is more relevant to the moment. But the answer could very well be both as Iran war fallout<\/a> and the rise of artificial intelligence collide at a decidedly inopportune moment.<\/p>\n Possible 2007-2008 parallels are all over the media. The tremors rippling through the private credit markets are rhyming a bit with the subprime crisis that shoulder-checked Wall Street nearly two decades ago.<\/p>\n The cracks in this shadowy US$1.8 trillion corner of finance have clear echoes of the subprime crisis. Liquidity is running scarce, or drying up altogether. The opacity\u00a0around how assets are priced appears to be exacerbating investors\u2019 concerns and driving\u00a0increased redemptions. <\/p>\n This, in turn, has observers worried about spillover effects on the broader public securities markets.<\/p>\n The plot thickened on March 6, when the globe\u2019s\u00a0largest asset manager, BlackRock, with US$14 trillion in assets, announced it would limit\u00a0redemptions from one of its flagship debt funds. That followed rival Blackstone\u2019s experiencing a record number<\/a> of redemption requests.<\/p>\n This move came weeks after alternative asset manager Blue Owl prevented investors from withdrawing cash at previously allowed intervals. BNP Paribas has frozen redemptions in some of its securitized debt funds. <\/p>\n Deutsche Bank flagged US$30 billion of exposure\u00a0<\/a>to private credit. But the financial giant admits it might confront indirect challenges through counterparties and interconnected portfolios.<\/p>\n \u201cThe red flags we are seeing in private credit today are strikingly familiar to those of 2007,\u201d Orlando Gemes, chief investment officer of Fourier Asset Management, tells Bloomberg.<\/p>\n 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 in the private credit industry are spreading.<\/p>\n There are new forces at play, too. One is how artificial intelligence how upending key economic sectors in real time.<\/p>\n \u201cMarket focus on AI-related disruption risk in software has intensified across\u00a0public<\/a>\u00a0and\u00a0private\u00a0markets,\u201d write analysts at\u00a0BMI, a unit of Fitch Solutions. \u201cPrivate\u00a0equity sponsors and\u00a0private\u00a0credit\u00a0lenders have meaningful exposure to the sector, with underwriting in parts of the buyout-backed software often tied to recurring revenue and growth assumptions rather than asset backing or established profit margins.\u201d<\/p>\n BMI notes that \u201cwe believe the impact on banks is likely to be limited because most of this activity sits outside the banking sector. However, private markets are less transparent and less liquid, which could make any change in pricing or risk appetite more abrupt.\u201d<\/p>\n All this is reminding global markets about JPMorgan CEO Jamie Dimon\u2019s oft-cited\u00a0observation<\/a>\u00a0last October, back when hidden loans at auto-parts supplier First Brands shook Wall Street: \u201cMy antenna goes up when things like that happen. And I probably shouldn\u2019t say this, but when you see one cockroach, there are probably more\u2026 Everyone should be forewarned on this.\u201d<\/p>\n The question for Asia is how many cockroaches might be running around under the surface. These risks are growing as the coming inflation surge from the Iran war roils global debt markets. And as major economies from the US to Eurozone to Japan face the risk of stagnation.<\/p>\n \u201cThe risk of a 1970s scenario is rising,\u201d notes Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management. If there\u2019s an extended war that drives oil prices up significantly further, he adds, \u201cthen the safe-haven status of government bonds are at risk, and with that, all assets.\u201d<\/p>\n This has Warren Buffett trending on social media. Namely, the famed value investor\u2019s observation that it\u2019s \u201conly when the tide goes out do you discover who\u2019s been swimming naked.\u201d As the tide of global capital goes out, there are growing concerns about how many funds will be found skinny dipping.<\/p>\n This has economists like\u00a0Mohamed\u00a0El-Erian\u00a0at Allianz\u00a0warning that the chatter around the private credit market suggests a \u201cclassic contagion phenomenon\u201d may be percolating. <\/p>\n Wall Street veteran George Noble, a longtime Fidelity fund manager, warns that \u201cwe\u2019re watching a financial crisis unfold in real time. The last time funds started blocking investors from getting their money back, Bear Stearns<\/a> collapsed six months later.\u201d<\/p>\n \u201cAfter 2008, regulations pushed risky lending out of banks and into private credit,\u201d Noble notes. \u201cThe sector ballooned to $3 trillion. But these funds make five-to-seven year loans while promising investors quarterly liquidity.\u201d<\/p>\n Asked about the parallels to 2008, Lloyd Blankfein, former CEO of Goldman Sachs, tells Bloomberg that \u201cit sort of smells like that kind of a moment again, I don\u2019t feel the storm, but the horses are starting to whinny in the corral.\u201d<\/p>\n Asia\u2019s export-led and dollar-dependent economies would be on the frontlines of any contagion effects that come from the US credit markets. And from the strong dollar, which gets us to why the ghosts of 1997 and 1998 are suddenly haunting Asia.<\/p>\n One side effect of the US-and Israeli-led Iran war is that the dollar\u2019s wrecking-ball tendencies are bursting back onto the scene. Despite the US national debt nearing US$39 trillion<\/a> and high inflation, and President Donald Trump\u2019s tariffs, the dollar is rising against all odds. This could be a clear and present danger for Asia\u2019s 2026.<\/p>\n Past episodes of extreme dollar strength haven\u2019t gone well for the most dynamic economic region. The most obvious example was the 1997-1998\u00a0Asian financial crisis. That reckoning had its roots in the Federal Reserve\u2019s 1994-1995 tightening cycle. At the time, the Fed doubled short-term interest rates in just 12 months. The resulting surge in the dollar made\u00a0it impossible for Asia\u2019s currency pegs to the dollar to be maintained. First Thailand devalued in July 1997. Next Indonesia. Then South Korea.<\/p>\n Other episodes include the 2013 Fed \u201ctaper tantrum<\/a>.\u201d The turmoil prompted Morgan Stanley to publish a \u201cfragile five\u201d list on which no emerging economy wanted to be. The original group: Brazil, India, Indonesia, South Africa, and Turkey.<\/p>\n Now, a\u00a0stubbornly strong dollar\u00a0is complicating Asia\u2019s development plans anew. History\u2019s greatest magnet is luring capital from every corner of the globe, hogging wealth needed to finance budget deficits, keep bond yields stable and support equity markets.<\/p>\n Clearly, Trump won\u2019t like this dynamic, as Asia\u2019s top two currencies are trending lower versus a strong dollar. Trump, after all, has been trying to weaken the dollar for years \u2014 an effort that has him trying to end the Federal Reserve\u2019s autonomy to make its own rate decisions.<\/p>\n AI and the disorientation surrounding it add to these vulnerabilities across Asia. As Moody\u2019s Analytics notes in a report, \u201cthe Middle East conflict has sent shockwaves through Asian equity markets, exposing uneven vulnerabilities across the region, with South Korea<\/a> seeing the steepest selloff. The shock followed a strong, AI-driven rally that had left the technology-heavy markets of South Korea and Taiwan with elevated valuations, making them acutely exposed to a sudden shift in risk appetite.\u201d<\/p>\n The Iran conflict, Moody\u2019s argues, \u201ctriggered macro and financial shifts that are weighing most heavily on the very economies where AI optimism had recently raised valuations to stretched levels.\u201d And \u201cwhile the initial shock may subside, market volatility looks set to stay elevated.\u201d<\/p>\n These risks are exacerbated by the ways a rising dollar might pull giant waves of capital out of Asian assets. One worry as Asian exchange rates come under downward pressure is that offshore debt may become harder to service. Then there\u2019s what might befall the so-called \u201cyen-carry trade.\u201d<\/p>\n Japan\u2019s zero-interest-rate policy since 1999 has turned it into the globe\u2019s top creditor nation. For decades, investment funds\u00a0borrowed cheaply<\/a>\u00a0in\u00a0yen\u00a0to bet on higher-yielding assets around the globe. As such, sudden\u00a0yen\u00a0moves slam markets virtually everywhere. It became one of the globe\u2019s most crowded trades, one uniquely prone to correction.<\/p>\n At the same time, Japanese Prime Minister Sanae Takaichi has been pushing for a weaker yen. That includes prodding the Bank of Japan to throttle back on rate hikes and quantitative tightening. The slightest hint of Tokyo manipulating exchange rates could prompt Trump to threaten new trade curbs on Japan.<\/p>\n There\u2019s no telling how a weaker yen might play in Beijing. As China\u2019s growth slows and deflationary pressures abound, a weaker yuan could go a long way to reviving Asia\u2019s biggest economy.<\/p>\n