A perfect storm is brewing of Trump’s own making
While the war in Iran shows no immediate signs of ending, the world’s attention rightly remains focused on developments in the Gulf. That, however, does not mean that time stands still on other matters – or indeed on how the war itself is affecting issues beyond the immediate US-Israel and Iran conflict.
In Cyprus, attention has been dominated by the foot-and-mouth disease and its potentially severe impact on the economy. In the financial world, however, attention is increasingly given to negative developments in private credit – the financial asset class that has ballooned since the 2008 financial crisis to roughly $2 trillion today.
Private credit expanded rapidly after the 2008 crisis as banks withdrew from lending amid stricter capital and regulatory requirements. It grew within the shadow banking sector, providing loans to higher-risk borrowers. Firms such as BlackRock, Apollo, Blackstone and Cliffwater expanded significantly, largely because they were not subject to the same regulatory constraints as deposit-taking institutions. Instead, they relied on investor funds, often with restrictions on redemption.
Yet despite these limits – typically capping quarterly withdrawals at around 5 per cent of a fund’s value – the private credit market is now witnessing an investor exodus. High-profile corporate failures have raised concerns about loan quality, particularly among AI-vulnerable software firms. Observers note that the elevated returns reported by private credit funds do not appear consistent with their valuations, given the risks implied, as suggested in the Financial Times on March 11 “Does private credit have a credit quality problem?”
The parallels with the 2008 subprime crisis are becoming harder to ignore. At the time, many argued that the subprime market – estimated at around $1.3 trillion – was too small to trigger systemic instability. In reality, the interconnections between shadow banks such as Lehman Brothers and Merrill Lynch and the mainstream banking sector proved decisive.
Today, the degree of leverage and interconnectedness between shadow banks and traditional financial institutions remains unclear. Estimates of direct exposure range from $100 billion to $500 billion, but uncertainty persists. JPMorgan has already curtailed some lending to private credit funds after marking down loan values. Meanwhile, Deutsche Bank has disclosed a $30 billion exposure, saying it is not exposed to “significant risks” related to non-bank financial institutions but warning of potential indirect risks through counterparties and interconnected portfolios. Those who recall August 2007 – when BNP Paribas froze three subprime investment funds – will remember how this was arguably the start of what culminated in the 2008 Lehman collapse.
A financial crisis, even a modest one, is not something US President Trump would welcome at this moment. He recently postponed a high-profile trip to China, citing the need to manage the war in Iran. Compounding the challenge, the political boost he gained following the Venezuela-Maduro episode appears to be fading.
Rising oil prices are likely to weigh on both the global and US economies. Inflation concerns have resurfaced, and Wednesday’s decision by the Federal Reserve to keep interest rates steady signals that interest rate cuts are unlikely in the near term. Indeed, further increases remain possible despite a weakening employment outlook. Such a scenario would put additional pressure on asset prices, including private credit valuations.
Faced with these developments, Trump has sought out international support. However, alliances require cultivation, not coercion. Leadership grounded in persuasion and shared purpose tends to yield more durable results than pressure-driven compliance.
Trump’s transactional approach is now showing its limitations. In a Truth Social post last Saturday, Trump called on countries including China, France, Japan, South Korea and the UK to deploy naval forces to secure the Strait of Hormuz. Yet nobody responded with urgency. In traditional style, Trump lashed out at his “allies” warning in an interview with the Financial Times that such reluctance would be bad for Nato. This ignoring the fact that Nato was supposed to be a defensive organisation, coming to one’s aid when attacked, not for joining a war of choice.
It is becoming clearer that the US-Israeli action against Iran was a war of choice rather than necessity. The Guardian reported on March 17 that the UK national security adviser, Jonathan Powell, who was present at the final talks in Geneva, judged that discussions were significant enough to prevent a rush to war, backing up the claims of the mediator of the talks, Oman’s foreign minister Badr Albusaidi, that a diplomatic solution was within reach.
In addition, the US director of national intelligence, Tulsi Gabbard in giving evidence at the Senate intelligence committee said: “It is not the intelligence community’s responsibility to determine what is and is not an imminent threat. That is up to the president,” casting doubt about the immediacy of the threat assessment underpinning the decision.
The key concern, as the war drags on, is whether Russia (already allegedly reported as providing intelligence to Iran), will be drawn in the conflict. As Israel continues successfully targeting senior Iranian officials, speculation has emerged whether Iran’s new Supreme leader, Mojtaba Khamenei, has sought refuge in Russia, arguably for receiving medical treatment. Even limited involvement from actors such as Russia would significantly escalate the conflict.
Meanwhile, reports of two Russian energy shipments to Cuba, which are expected by Monday, would challenge US sanctions policy, introducing yet another geopolitical flashpoint.
Whether these converging pressures will culminate in a true “perfect storm” – or dissipate before reaching critical mass – remains uncertain. What is clear, however, is that unlike natural storms, many of the forces now gathering are the product of Trump’s political decisions, not chance.