Ghosts of 1997 and 2008 stir as Iran spooks markets

TOKYO — 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’s debt-fueled growth boom ended disastrously.

Economists can debate which comparison is more relevant to the moment. But the answer could very well be both as Iran war fallout and the rise of artificial intelligence collide at a decidedly inopportune moment.

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.

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 around how assets are priced appears to be exacerbating investors’ concerns and driving increased redemptions.

This, in turn, has observers worried about spillover effects on the broader public securities markets.

The plot thickened on March 6, when the globe’s largest asset manager, BlackRock, with US$14 trillion in assets, announced it would limit redemptions from one of its flagship debt funds. That followed rival Blackstone’s experiencing a record number of redemption requests.

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.

Deutsche Bank flagged US$30 billion of exposure to private credit. But the financial giant admits it might confront indirect challenges through counterparties and interconnected portfolios.

“The red flags we are seeing in private credit today are strikingly familiar to those of 2007,” Orlando Gemes, chief investment officer of Fourier Asset Management, tells 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 in the private credit industry are spreading.

There are new forces at play, too. One is how artificial intelligence how upending key economic sectors in real time.

“Market focus on AI-related disruption risk in software has intensified across public and private markets,” write analysts at BMI, a unit of Fitch Solutions. “Private equity sponsors and private credit lenders 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.”

BMI notes that “we 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.”

All this is reminding global markets about JPMorgan CEO Jamie Dimon’s oft-cited observation last October, back when hidden loans at auto-parts supplier First Brands shook Wall Street: “My antenna goes up when things like that happen. And I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this.”

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.

“The risk of a 1970s scenario is rising,” notes Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management. If there’s an extended war that drives oil prices up significantly further, he adds, “then the safe-haven status of government bonds are at risk, and with that, all assets.”

This has Warren Buffett trending on social media. Namely, the famed value investor’s observation that it’s “only when the tide goes out do you discover who’s been swimming naked.” As the tide of global capital goes out, there are growing concerns about how many funds will be found skinny dipping.

This has economists like Mohamed El-Erian at Allianz warning that the chatter around the private credit market suggests a “classic contagion phenomenon” may be percolating.

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,” Noble notes. “The sector ballooned to $3 trillion. But these funds make five-to-seven year loans while promising investors quarterly liquidity.”

Asked about the parallels to 2008, Lloyd Blankfein, former CEO of Goldman Sachs, tells Bloomberg that “it sort of smells like that kind of a moment again, I don’t feel the storm, but the horses are starting to whinny in the corral.”

Asia’s 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.

One side effect of the US-and Israeli-led Iran war is that the dollar’s wrecking-ball tendencies are bursting back onto the scene. Despite the US national debt nearing US$39 trillion and high inflation, and President Donald Trump’s tariffs, the dollar is rising against all odds. This could be a clear and present danger for Asia’s 2026.

Past episodes of extreme dollar strength haven’t gone well for the most dynamic economic region. The most obvious example was the 1997-1998 Asian financial crisis. That reckoning had its roots in the Federal Reserve’s 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 it impossible for Asia’s currency pegs to the dollar to be maintained. First Thailand devalued in July 1997. Next Indonesia. Then South Korea.

Other episodes include the 2013 Fed “taper tantrum.” The turmoil prompted Morgan Stanley to publish a “fragile five” list on which no emerging economy wanted to be. The original group: Brazil, India, Indonesia, South Africa, and Turkey.

Now, a stubbornly strong dollar is complicating Asia’s development plans anew. History’s 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.

Clearly, Trump won’t like this dynamic, as Asia’s top two currencies are trending lower versus 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.

AI and the disorientation surrounding it add to these vulnerabilities across Asia. As Moody’s Analytics notes in a report, “the Middle East conflict has sent shockwaves through Asian equity markets, exposing uneven vulnerabilities across the region, with South Korea 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.”

The Iran conflict, Moody’s argues, “triggered macro and financial shifts that are weighing most heavily on the very economies where AI optimism had recently raised valuations to stretched levels.” And “while the initial shock may subside, market volatility looks set to stay elevated.”

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’s what might befall the so-called “yen-carry trade.”

Japan’s zero-interest-rate policy since 1999 has turned it into the globe’s top creditor nation. For decades, investment funds borrowed cheaply in yen to bet on higher-yielding assets around the globe. As such, sudden yen moves slam markets virtually everywhere. 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 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.

There’s no telling how a weaker yen might play in Beijing. As China’s growth slows and deflationary pressures abound, a weaker yuan could go a long way to reviving Asia’s biggest economy.

In the interim, troubles in US credit markets and inflationary threats from the Iran war are putting Asia in the very center of the collateral damage zone. And forcing policymakers across the region to heed the scary lessons of 2007, 1997 and beyond.

 Follow William Pesek on X at @WilliamPesek