Jamie Dimon, CEO of JP Morgan Chase, the largest bank in the United States, warned of the risk of worsening inflation due to war with Iran through his annual letter. In particular, rising interest rates and declining asset values caused by inflation are expected to deal a direct blow to private credit, which has been causing financial market instability due to default risks.
On the 6th (local time), CEO Dimon released his annual shareholder letter and analyzed, "With war with Iran, we face the possibility of oil and commodity price shocks and the restructuring of global supply chains."
CEO Dimon identified "gradually rising inflation" as the biggest issue this year and predicted that if this occurs, interest rates could rise and asset prices could fall. He stated, "Interest rates have a gravity-like effect on most asset prices," adding that "household net worth currently stands at 560% of U.S. GDP, so a crash could have serious effects on global markets."
CEO Dimon also expressed concern that the private credit market would be affected. He first noted that the private credit market totals $1.8 trillion in size, which is small compared to the $13 trillion investment-grade corporate bond market or mortgage market, and assessed that it is "unlikely to cause systemic risk (spread to other sectors such as banks)."
However, he explained that when the credit cycle turns, leveraged loan losses (funds raised in loan form by companies with high debt ratios or low credit ratings) could be greater than expected. Excessive optimism, covenant loosening, and increased use of payment-in-kind (PIK—adding to principal rather than cash payments) were cited as factors that could amplify losses.
CEO Dimon analyzed, "Private credit lacks transparency and generally does not have strict valuation standards applied, so if market conditions are expected to deteriorate, investors are likely to sell," adding that "if interest rates or credit spreads rise and insurance regulators demand stricter rating assessments in the future, companies will need more capital."
In October of last year, following the bankruptcy of U.S. companies First Friends and Tricolor, CEO Dimon had also warned of credit market risks including private credit, stating, "If one cockroach appears, there are probably more."