Macro Moments Weekly: Credit pressure begins to build

As the economic cycle begins to turn in Europe, and as growth picks up again after a drag from energy costs and rising interest rates, credit lending and quality should improve. Today, corporate credit spreads comfortably maintain among the lowest spreads in history relative to sovereigns. This is a traditional signal of stress, and it has hardly ever been less stressed!

The central bankers, looking down at a well-capitalised banking system, will congratulate themselves on rebuilding a better, safer, more reliant credit system than the last one that collapsed in 2009. The current system has coped well with the stress of sharply rising rates. Now, as rates fall again, some signs of growth are emerging.¹

Why should we worry about credit?

There are a few things blowing in the wind that would challenge the low-stress outlook. First, in the mayhem of the software selloff, Pitchbook data suggest that 17% of lending in the credit sector is to companies in the frontline of the artificial intelligence (AI) assault.² Estimates from 9Fin indicate that information technology and communications account for 20%‒25% of private credit deals,³ in effect backing up Pitchbook’s numbers. The share prices of the quoted private investment companies have reacted badly, falling sharply.

But what has really set the hares racing is that Blue Owl⁴ gated one of its largest retail private credit funds. It was unable to meet redemptions in an orderly fashion and needed breathing space. This is not unheard of: Blackstone’s BREIT property fund⁵ did the same in 2022 and was able to use the time to restore confidence by meeting redemptions over time.⁶

Heightening the general concern, last autumn the Bank of England commissioned the first investigation into private credit lending by a central bank, and we are waiting for the results.

Private credit stepped into the breach left by the banks after 2010. As such, this industry has provided a vital role in financing growth and change. Private credit lenders have knowledge and understanding of the loans they make, giving them an enviable return profile relative to other private assets and, more importantly, versus quoted, technically liquid corporate debt. That advantage has not gone away, but the opaque nature of their business and the lack of data is worrying outsiders.

We view this alongside other factors: The equity markets have clearly identified software providers as bearing the brunt of the AI disruption. Predictive lending models that banks first pioneered used the correlation of sector performances in equity markets and found it was a lead indicator of feast or famine. These models still use the same method, and as such, this weakness will have implications for the restriction of credit to the sector.

But if you look wider, there are other indicators that should cause us worry. Klarna, the short-term lending specialist that listed its shares for trading in September 2025, has so far lost 65% of its value. As it moves from ultra-short payday loans to longer credit and credit cards, it must recognise potential losses at the start of these loans. While this is a forecast rather than actual results, in a world where the consumer continues to be under pressure from the cost-of-living crisis and lack of growth in real wages, this seems a concern.

Centrica’s comments added more evidence. As a major gas supplier to UK households (trading as British Gas), it reported bad debts (those outstanding for more than 360 days) rose 21%.⁷

Each example is nothing much on its own. None of this should panic investors. Actually, it may be a comfort, as each of these problems has a different source, either from structural or cyclical threats. But taken together, with weak labour market surveys across Europe, we should be worrying about the pace and resilience of growth. The latest Purchasing Managers Index releases make clear that service sector employers are reacting to rising costs by reducing staff.⁸

As we look to the future, we should be asking how inflation is hanging on. All of this builds a world view that things are tough in the labour market and tough for consumers. That points to more, not fewer, rate cuts, which of course helps solve the problem of bad debt! But it may mean that growth will be subdued as well.

Parting shot

As we watch the Winter Olympics, with skating, skeleton and ice hockey controversies, it is worth remembering that the point of watching sport is to see if an athlete can perform when under pressure. It is always compelling because you, the viewer, do not know the outcome. That gives us the true definition of skill: Something you can still do when under extreme pressure. It’s a definition we should keep in mind as investors.