[0:00]Many of Europe's top bankers did themselves no favors this past week, when attending a conference, they were asked about their thoughts on the growing private credit crisis. And many of them responded with, it's not really a problem for us, or a couple even said, it's not even a big problem at all.
[0:17]Now, one banker, one other European banker who doesn't agree with them, who works for Deutsche Bank, and Deutsche Bank would know whether it's exposure to the space, he said, instead, if it wasn't for the Iran conflict, this is all we would be talking about.
[0:32]Because the chances for systemic fallout are much higher than people appreciate. And while Europe's bankers are running around saying there's nothing to see here, European bank balance sheets say something else entirely.
[0:44]It's not what they say, it's what they do. And wait till you see what's going on their balance sheets.
[0:50]Now the actual quote from the banker at Deutsche Bank, Ozan Tarman, I think he says it best. Quote, headlines are not going away, and if anything, they are definitely hiding behind Iran at the moment.
[1:02]It would be almost all we would be talking about, especially in the US, if it wasn't for Iran, Tarmon said.
[1:08]And that's exactly why at a Morgan Stanley conference last week, top European executives either downplayed the mess, or denied their banks had anything to do with it.
[1:17]Zero exposure, some of them claimed. However, the comment from the CEO of Barclays said far more than all the rest of them could as they hid behind these carefully phrased denials.
[1:27]When asked if he would buy the dip in private credit, Venkat as he's known, bluntly stated, unlikely. Now, this isn't to say that the fallout from the oil shock isn't something to be concerned about.
[1:40]We're already seeing problems emerge across the European economy and elsewhere, too. The hits start out with primarily sentiment weakening, including a big one, a big hit to an influential German survey.
[1:52]But also the GDP downgrades have begun, the OECD doing that already. And when you put these two together, it's enough to force the ECB to cut rates well below the 2% they're already at.
[2:03]Even though, as right now, you've probably heard, all they want to do in Europe is hike them as fast as possible. And why there's a good chance that they will hike them in the short run, what we're saying is that these long-run problems mean just like 2008, Europe ends up heading down lower.
[2:18]It's enough to make Jean-Claude Trichet, Jean-Claude Trichet, the guy who hiked rates in 2008. It's enough to make him embarrassed.
[2:26]Because after all, maybe the Europeans should be listening to their counterparts in Mexico, because down in Mexico, on Thursday, Banxico, as the Central Bank is known, actually restarted its rate cuts. Yes, let me say that again.
[2:38]They restarted their rate cuts for the month of March, citing risks, downside risks to the economy.
[2:45]Not upside risks to inflation, but in response to the oil shock, expecting more problems with output, employment, activity, the necessarily prices.
[2:55]But we'll get to all that what's going on in Mexico and Europe, but first private credit. It's not just the US problem, though I think a lot of people have that impression. It's certainly a false one.
[3:06]After all, as I showed you last fall, European banks had panicked into a shadow bailout of shadow banks in euros, not dollars.
[3:12]And then bankers told the ECB in its quarterly bank lending survey, they were not all that sanguine about quite a lot of things, but corporate credit first and foremost.
[3:22]As Bloomberg put it at the time, when it was predictably shocked by the results, quote, Eurozone banks unexpectedly tightened corporate credit standards at the end of 2025, raising doubts about investment and economic activity before the European Central Bank sets interest rates this week.
[3:37]This is last month. Concerns about the outlook for firms and the broader economy, as well as banks' lower risk tolerance, contributed to the move, the ECB said Tuesday in its fourth-quarter Bank Lending Survey, and that's before the oil shock hits and what's that's going to do to already struggling borrowers and already struggling employers.
[3:56]Now the actual quote from the bank lending survey was far more blunt. It didn't sound like European bankers thought Europe was in a good place or even heading toward one, quite the opposite, with corporate credit high on their list of concerns.
[4:08]From the survey itself, it said, quote, the net tightening signaled a high degree of risk aversion and a prudent approach to lending by banks.
[4:15]Let me say it again, high degree of risk aversion. As part of their perceived risk, banks referred to a tightening impact of both the industry specific and firm specific situation and the general economic outlook. In other words, they looked at some cockroaches, but also didn't like the overall environment to which those cockroaches were appearing.
[4:36]And in response, European banks went on an epic government bond buying spree. Sure, this was before the oil shock of March and the rate hike panic among European Central bankers, but up until then, what institutions were doing was far more consistent with an economy and credit market heading headlong in the wrong direction.
[4:55]Lagarde says, good place, but the banks there keep buying assets as if that's just not the case. In fact, the more ECB officials bring up their good place theory and rhetoric, the more European banks seem to buy safety, almost as if they know central bankers are trying to sell the public mostly on a fiction, a fairy tale, a narrative.
[5:16]Now European banks want an epic safety spree to begin this year, buying the second most government bonds in any single month on record in January, but then they followed it up with another sizable increase during February.
[5:29]So together, the two months were well over 100 billion euros for only the third time in the last two decades.
[5:36]The one time, start of 2012, that was amidst the European banking crisis, and then again, to begin last year with all the chaos and mess surrounding trade wars and the financial blowback from fears over it.
[5:46]It's almost as if these European banks are increasingly worried about something, about not being in a good place. In reality, it isn't one thing or another, it isn't one factor or another, isn't just a single problem.
[6:01]It's a combination of downside possibilities that threaten to converge into one big ball of not a good place. And at the top of that list of concerns sits private credit.
[6:08]Now I've been saying since last fall this is something to pay attention to because it is very serious.
[6:14]And at least one European banker agrees with me, though, we have to be clear here, after we just reviewed what the European banks are up to themselves, their balance sheets and adding government bonds, whatever European bankers say at these conferences, what European banks do also add up to the same concern.
[6:30]However, in this one instance, what one of them says actually aligns with what they're all doing.
[6:36]Quote, Apollo President Jim Zelter told a conference in Melbourne on Thursday that negative media headlines pointing to systemic risk in the private credit sector couldn't be further from the truth, joining the likes of BlackRock, Blackstone, Blue Owl and State Street in trying to hose down concerns.
[6:52]However, Deutsche Bank's vice chair of global macro, Ozan Tarman, told Bloomberg's popular Odd Lots podcast in an episode released on Thursday that if it wasn't for the ongoing war in the Middle East, it would be the top issue weighing on investors' minds, alongside artificial intelligence.
[7:11]And what Tarman said was, if people cannot take their own money away from private credit and have to sell something liquid, then watch out for public credit, and of course, watch out for public equities, so I'm watching that space very carefully.
[7:25]But what if it spreads and spreads, and some of the big US banks start lending less? What if insurance companies get hit more and more, watch this space.
[7:37]It's a bit too superficial to say it's not systemic, it's going to be okay. I'm more worried than that. And as I said in the introduction, Tarman might know better than anyone, since Deutsche Bank has the largest private credit exposure, both direct and more importantly, indirectly of any bank in Europe.
[7:56]And I just did a two and a half hour deep dive webinar on this topic for these very reasons because I agree with Mr. Tarman, there is more here than what people appreciate. Yes, a couple of cockroaches, but this goes way deeper than cockroaches as we went into.
[8:10]And the main point, it's never really about the losses. People want to focus on the losses. That's not the thing to focus on. You need to understand the process, not private credit necessarily, but what happens when bubbles turn to bust.
[8:24]Now I've mentioned the three stages to any credit crisis, which turns it into a liquidity crisis or the systemic problem that Tarman was talking about.
[8:31]And as I showed in the webinar, that three-stage model not only makes intuitive sense, it actually fits very well with the 2008 crisis from before Ben Bernanke said subprime is contained, right into the various meltdowns in 2008.
[8:44]All the while central bankers missed everything, and bankers themselves kept downplaying the severities as if there was nothing ever to see there.
[8:53]We don't have to follow their views because there is this process, an identifiable process. And once you know what that process is and what it's all about, you can see here in 2026, what Tarman means, and therefore, how to make more informed decisions about future consequences and outcomes, whether they be financial, macroeconomic or whatever else.
[9:11]Like I said, there's a replay available. There's a link in the description. It's two and a half hours long. It is very well worth your time. You really got to see what I'm talking about.
[9:19]In fact, I went over a concrete example, or at least a hypothetical example, applying some of the more recent developments like JP Morgan and its collateral downgrade and really getting into why that was such a big deal and what it really means as far as this process, understanding where we are in the process, as well as what that means moving forward.
[9:39]That's a big one. So you're not going to want to miss the webinar, link in description if you want to see the replay.
[9:43]But some of Europe's top bankers, however, they don't agree, at least not in public. They don't agree that there's anything to come out of private credit, it's not a big deal to them, or if it does get messier, more questionable, it won't impact their banks.
[9:56]At least that's what they're saying. So get a load of this. Quote, nonexistent, marginal, not material, almost zero. That's how many European bank chiefs reacted when pressed on their exposure to private credit, an industry grappling with concerns over loan quality and an investor exodus.
[10:12]Executives from almost every major European bank, including Barclays, HSBC, Unicredit, Deutsche Bank, and Societe Generale, were asked about private credit during a Morgan Stanley conference in London this week.
[10:25]Many were quick to rule out any ties to the industry, or say they were confident about their existing exposure. Where have we heard all that before? Because it's totally believable.
[10:35]I mean, what else are they going to say? A few of them, like Jamie Diamond or Ozan Tarman, they'll claim big problems for Shadow Bank people, but, you know, they'll say also that we're totally insulated.
[10:45]Meanwhile, the stock market, the stock market isn't quite so sure about that. To begin with, while most of these banks are not directly involved, and this is where you really have to parse their statements, they do lend at times, and at times heavily to these investment funds, the shadow banks.
[11:02]Sure, they get collateral back from the borrowers, but as we've seen in 20 cockroach examples, it isn't quite the security it was made out to be.
[11:09]Moreover, like I just mentioned, look at what JP Morgan just did, revaluing collateral, which is absolutely huge.
[11:18]That's why I focused on it in one segment of our webinar, because I really wanted people to understand why it's huge and how it fits into this crisis process.
[11:25]But for our purposes here, it means that Diamond's bank, anyway, is distancing itself from private credit providers, pulling back from the shadow banks.
[11:35]That's why I think the most interesting comment from this banker conference actually came from a guy known as Venkat. He's the CEO of Barclays, and first he said, quote, in private credit, what we do is lend to managers and work with large, well-proved top-tier managers, and lend against their portfolio of loans.
[11:48]Venkatakrishnan said, we have no material concerns to report on private credit. Okay, but then he was asked if his bank would buy the dip in private credit.
[12:02]I mean, after all, if Barclays has no concerns about the space, a drop in prices due to an overly emotional overreaction to cockroaches, as it's being made out to be, that would surely create major buying opportunities.
[12:13]So would Barclays be jumping in on all the potential bargains? Well, the man known as Venkat simply said, unlikely. So there you go.
[12:24]At least he was honest enough about that. And for all their talk about a good place, all their talk among the top policy makers, the ECB, in their actions, not quite so sure.
[12:34]Again, right at the top of the list, the credit crisis, the growing credit crisis, because, as I keep pointing out, it is not solely a US or US dollar problem and phenomenon.
[12:40]The private credit bubble was indeed spread out throughout the rest of the major developed world, especially in Europe.
[12:53]The European Central Bank will begin a fresh round of checks on banks that it supervises as concerns intensify over loan quality in the private credit sector, according to people familiar with the matter.
[13:03]The ECB plans to ask banks for details of their dealings with direct lenders, said some of the people, who asked to remain anonymous as the matter is private. Ironic there.
[13:14]Previous such exercises addressed about a dozen banks, they said. And a spokesman for the ECB declined to comment. We have seen a worsening of the quality of the private credit portfolios in a number of cases, said the Croatian Central Bank Chief, who will become ECB vice president in June.
[13:31]And he followed up by saying, if there's any propagation of the shocks, we have to make sure that the financial sector stays stable. And you wonder why European banks have been loading up on government bond holdings?
[13:42]On the one hand, yeah, they got sucked and really suckered deeper into the European private credit bubble bus last fall, but on the other hand, they're buying up safety and liquidity as sort of a ballast in the case that the rising chances of it going wrong does indeed propagate into some wider shock as Deutsche Bank's Tarman admits is a real possibility.
[14:04]But of course, ignoring all of that, and focusing instead on the ridiculous expectations theory of oil shock and how that's supposed to become inflation through nothing more than psychology, European Central bankers themselves are running around talking about how there's going to be an inflationary impact.
[14:20]And there's going to be, in the short run, consumer price rates are going to go up, but only in the short run. So European Central bankers are focusing on an inflationary impact, and among oil prices, that doesn't exist.
[14:33]While not necessarily ignoring, but at least not giving it the attention it deserves, the private credit bust for all of this rate hike hysteria.
[14:43]So yes, there's going to be a short run increase in consumer price rates. In fact, that already happened. Spain, the first major European economy to report a CPI in March, and it was above 3% again, but actually came in much less than had been feared due to rampant pre-existing economic weakness combined with what energy price shocks really do to the economy.
[15:03]It's not a price spiral. That was certainly the message from Germany's IFO, which had a stark warning to the ECB and everyone else for that matter.
[15:11]If economists didn't poison the public with their ridiculous expectations theories that never pan out, has absolutely no historical evidence for it, least of all turning oil shocks. What the IFO had to say this past week would be common knowledge because it's nothing more than common sense.
[15:28]Quote, Germany's business outlook soured as higher energy prices due to the Iran war threaten to derail its nascent economic revival. An expectations index by the IFO Institute dropped to 86 from a revised 90.2, the lowest in more than a year.
[15:40]That was in line with the expectations of analysts in a Bloomberg survey. A gauge measuring current conditions unexpectedly held steady. The war in Iran has put any hope of a recovery on ice for the time being, according to IFO's president, who who then added, uncertainty among companies has increased noticeably.
[16:00]Now, Europe didn't really have any hope for recovery, just look at what European banks are doing and that tells you everything you need to know.
[16:07]Now GDP, for example, it has indeed been slightly positive for some time, but that's not the same thing as recovery. Instead, it was still forgetting how to grow as Europe sinks deeper and deeper into a recession no one recognizes, at least outside of bank balance sheets.
[16:22]But it's every bit responsible for everything going on, up to and including the private credit bust itself. But central bankers, especially in Europe, they can't help themselves.
[16:31]They've got to hike. They've got to live up to Trichet's legacy, the guy, the ECB president, who not only raised rates in the middle of 2008, solely because of oil, he did it again twice in 2011, solely because of oil, and both times, ignoring systemic credit problems and banking difficulties, not to mention all the signs that Europe was in or about to be in outright recession of even the kind that governments can't cover up.
[16:57]So what the ECB should do right now is instead listen to what their North American counterparts are currently saying, like the short-term spike in the CPI that they expect, but then more likely higher unemployment thereafter, as well as what one Central Bank in North America is already doing.
[17:14]Mexico's Central Bank cut its policy rate on Thursday, restarting a rate-cutting process, even though oil price inflation hysteria is raging all across the mainstream, egged on by the European Central bankers pouring rhetorical gasoline on a fire of economic ignorance and distraction.
[17:32]Instead, Banxico, as it's called, was perfectly level-headed, sticking to actual economics. And the reason it restarted its its rate-cutting cycle was, as it said in its statement, concern over a weakening economy, despite the fact that consumer prices there were already accelerating a little bit before March began and the oil shock.
[17:52]So the Central Bank says, we're more concerned about the downside than any uncertainty about consumer prices on the upside. Again, we know what's going to happen with consumer prices. There're going to be ugly CPIs in March and probably April.
[18:05]But after that, it's not going to be about inflation. It's going to be about rate cutting. So if not for Iran and ECB giving the financial media what it has desperately wanted for four years, another crack at what it thinks would could be the 1970s all over again, that guy from Deutsche Bank, Tarman, is absolutely right.
[18:24]The private credit bust would be right at the top of everything. Not this idea of oil price inflation, which has been debunked three times just in the 2020s, not to mention every single time in history, 1973, 1979, 1990.
[18:38]Recessions, not inflation. You put that together with the credit crisis, one that is far more global than people appreciate, and what you're going to see is, after the initial rate hiking panic in Europe, rates are going to go down, down, significantly.
[18:51]Once the economy takes the full hit from oil and credit combined, and that would be another parallel to 2008, only a few months after hiking in 2008, the ECB, like everyone else, was furiously cutting to end that particular year.
[19:09]Even if the energy shock is resolved quickly, there's damage that's already being done, and you combine that with the credit crisis, and you can see where Tarman is coming from.
[19:20]You can see how he's correct. You can see why European banks are buying boatloads of government bonds, safety and liquidity. The future is more Banxico than ECB.
[19:32]We've covered a lot of ground, a lot of in-depth discussion on our webinar. There's a link in the description if you want to see a replay of it. I highly recommend you check that out.
[19:42]As always, thank you very much for joining me. Huge thank you to Eurodollar University members and subscribers. And until next time, take care.
