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Macroscope | As private credit warnings grow, the fear is that the horse has bolted
- The IMF is warning regulators about the systemic risks of the rapidly growing private credit market, a largely opaque sector involving direct lending to corporations
- But as in the past, this could be a case of locking the stable doors after the horse has bolted
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Why you can trust SCMP
Here we go again, sliding down the slippery slope that could lead to another international financial crisis. As in 2008 with the global financial crisis, the present threat is in what many would regard as an obscure corner of the financial system.
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This time, it’s the private credit market and, as was the case with those subprime mortgages that triggered the 2008 crash, few people beyond a narrow circle of financial regulators seem to know what private credit is and why it represents a threat.
The market consists of myriad investment funds and other financial institutions that moved into direct lending to corporate borrowers after many banks retreated from such lending in the wake of 2008.
Private credit has since grown to around US$2 trillion, according to the IMF, which is raising a red flag over the sector. While this is small relative to the size of the financial system, private credit has the potential to suck much larger chunks of the system into a vortex.
The private credit market is located chiefly in the United States (as was the subprime mortgage market) but the systemic crisis fears that the sector is provoking are justified wherever financial markets exist – i.e. just about everywhere.
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Private credit is not the only threat on the financial horizon. See-sawing interest rates may have done little harm as yet to borrowers or lenders in critically important housing markets but this threatens to change as fixed-rate residential mortgages expire, posing a threat of defaults.
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