Mohamed El-Erian says private credit stress is flashing signs of a 'classic contagion phenomenon'

• Mohamed El-Erian said he's watching stress in the private credit markets.
• Liquidity has emerged as a worry, and El-Erian says he sees contagion risk.
• Investors are weighing private credit woes, oil prices, and AI fears.

Famed economist Mohamed El-Erian says the headlines swirling around the private credit market suggest a "classic contagion phenomenon" may be brewing.

The former PIMCO chief investment officer warned that issues with liquidity and redemptions in private credit could produce a situation for investors in which, "If you can't sell what you want, you sell what you can."

He flagged a Bloomberg story making the rounds on Thursday that said Morgan Stanley and Cliffwater capped withdrawals from private credit funds, the latest firms to make such a move in the last few weeks.

"The proliferation of such headlines increases the risk of what I call the 'ATM' scenario: investors forced to liquidate other healthy funds simply because they become the go-to source of available cash—even if those funds are fundamentally sound or operating in an entirely different asset class," he wrote.

"It's a classic contagion phenomenon: 'If you can't sell what you want, you sell what you can.'"

Private credit worries have emerged in recent months, with concerns ramping up earlier this year after Blue Owl halted redemptions on one of its private credit funds offered to retail investors. Other firms, including Blackstone and BlackRock, have also been hit with redemption requests.

Some on Wall Street have warned that the withdrawal freeze is reminiscent of the lead-up to the 2008 Great Financial Crisis. El-Erian said recently that it could be a "canary-in-the-coalmine" moment akin to 2007, when BNP Paribas halted withdrawals from some securitized debt funds, a moment some regard as the precursor to the 2008 crash.

More recently, George Noble, a longtime Fidelity fund manager and Wall Street veteran, warned "We're watching a financial crisis unfold in real time."

In his post on Thursday, El-Erian named private credit stress, along with hefty AI spending, as risks to the market that are being compounded by the ongoing conflict in the Middle East.

The war in Iran and the accompanying surging oil prices have been top of mind for investors, drawing attention away from AI disruption fears and private credit worries.

According to the Financial Times, Kunal Shah, an executive at Goldman Sachs, recently said that private credit clients are "glad" the war in Iran has provided a "distraction" from AI exposure.