Private sector credit ING: No systematic risk, but "threat clouds are gathering"

(Teleborsa) - Timothy Rahil and Jeroen van den Broek, economists at ING, believe that recent events in the private credit sector do not represent a systemic risk.However, they raise important questions about the broader implications for spread markets, default rates and the impact of questionable rating practices.

"We expect developments in the private debt market to continue to make headlines and contribute to the coming revaluation of high-beta debt markets. We name this 'baby bear' event as one of the key risks to the Goldilocks credit story of 2026."We do not consider this a systemic risk event.Financial Research and Moody's offer encouragement.

In view of the latest news, "it seems inevitable that the redemption pressure will remain in private credit funds, and most funds will probably maintain the ceilings or restrictions on withdrawals. A high level of redemption required is significant: it creates a situation where funds facing long outflows are forced to put money to meet the withdrawals.

Market commentary, they added, was largely unanimous that the credit cycle appeared to be nearing a turning point.As the CEO of Goldman Sachs noted last week, the credit cycle "hasn't stopped" and identified the AI ​​revolution as a potential catalyst.

The AI revolution and geopolitical tensions, particularly in the Middle East, pose structural and long-term obstacles." AI highlights the risks associated with the industry's heavy focus on software and SaaS lending. If the AI-driven revolution doubles Fitch's current 5.2% rate of private loan defaults, the geopolitical cost of capital will also be impacted over time. This environment raises the possibility that funding costs will remain high."Rachel and van den Broek continued.

The two economists wonder what room is left for central banks to act if funding markets deteriorate further.

The coming period therefore represents "a significant test for the private credit market, as internal vulnerabilities and external shocks converge. For the credit market in general, the change is set to intensify pressure as the recovery in the credit cycle develops. Credit spreads and funding costs may only be in the early stages of a longer-term upward movement."

Overall, Rahil and van den Broek see "dangerous clouds gathering."In fact, "stresses in the private credit market (Baby Bear) could lead to a broader revaluation of prices for leveraged loans, high-yield loans and ultimately investment-grade loans as the virus spreads. Financing through markets, both private and public, would become significantly more expensive and, in fact, unavailable to some borrowers."

Meanwhile, fears of inflation stemming from turmoil in the Middle East are "prompting central banks to consider raising rates."In the current conditions of the private and public debt markets, "it is difficult to raise rates".This causes central banks to "suspend (or even reduce) rate hikes and, as a result, resume quantitative easing."

Abroad, Rahil and van den Broek point out that US regional banks have a significant impact on private credit, with approximately 4-5% of their assets tied directly to private credit holdings.In addition, they are "exposed to liquidity mismatch."This leads economists to estimate that balance sheets expand at worst.High funding needs reduce liquidity reserves.As a result, underlying assets deteriorate and collateral security diminishes.

For European banks, however, exposure to the non-banking sector could have an "impact through poorer credit quality, higher charge-offs and lower profits."In a severe scenario, Rahil and van den Broek note, this could erode capital and increase funding costs as market risk premiums rise.For banks, however, the effects are not expected to be too drastic, as much of their exposure is collateralized by asset-backed securities.

(Teleborsa) 03-27-2026 15:46

“We expect developments in the private credit market to remain in the headlines and contribute to the upcoming revaluation of higher beta credit markets.We have identified the bear phenomenon as one of the key risks to Goldilocks' credit history for 2026.We do not consider this a systemic risk event.Reassurance,” Rahil and Van den Broek note.

According to the latest news, "There will be withdrawal pressure on private credit funds and most funds may maintain maximum withdrawal limits or restrictions. This creates a situation where funds facing prolonged withdrawals are forced to reserve cash to meet withdrawals. As a result, they may slow down new distribution cycle sales."

Market commentators, he added, largely agree that the credit cycle appears to be approaching a turning point.As the CEO of Goldman Sachs put it last week, the credit cycle “has not been cancelled,” and identified the AI ​​revolution as a potential catalyst.However, "a deeper concern lies in the multiple potential contagion pathways if stress increases further or other negative catalysts emerge. Private credit remains an unregulated market, characterized by irregular practices, risk concentration and liquidity imbalances."

The AI ​​revolution and geopolitical tensions, particularly conflicts in the Middle East, represent structural and long-term obstacles."AI highlights the risks associated with the industry's strong focus on software and SaaS lending. If the AI-driven revolution doubles Fitch's default rate for private debt from its current 5.2%, the implications for the cost of capital will be significant. At the same time, the geopolitical environment reinforces the likelihood that funding costs will remain high," continue Rahil and van den Broek.

Both economists then wonder what leeway central banks have left to respond if funding markets deteriorate further."Restarting large-scale asset purchase programs to reduce funding costs would be extremely difficult, if not impossible, if inflation remains above target," they note.

The future therefore represents a major challenge for the private credit market, to the extent that internal vulnerabilities and external shocks combine. For the credit market as a whole, this change in the credit cycle will intensify the pressure.

All in all, Rahil and van den Broek see "evil clouds gathering"."Specific debt burden (Baby Bear) can lead to higher premiums, higher profits, and ultimately higher investment costs as the risk spreads.

Meanwhile, fear of inflation stemming from the turmoil in the Middle East is "encouraging central banks to consider rate increases."In the current context of private and public credit markets, "it is difficult for rates to rise".This leads central banks to "delay increasing rates (or even cut them) and, as a result, resume quantitative easing."

Abroad, Rachel and van den Broek point out that banks in the U.S. region have large exposures to personal loans, with 4-5% of their assets tied to holding personal loans.In addition, they "suffer from poor balance."This leads economists to predict that the balance sheet will expand at worst.A higher capital demand reduces working capital.As a result, the underlying asset deteriorates and the collateral offered decreases.

As for European banks, exposure to non-banking sectors can have "an impact through negative credit, reduced assets, and lower profits."In extreme cases, Rahel and van den Broek note, it can lead to capital erosion and increase the cost of financing due to high market risk.As for the banks, "the consequences are not expected to be very serious, because a large amount of their exposure is to ensure that the assets are stable."

(Teleborsa) 27-03-2026 15:46