Four risks that could derail global credit in 2025

Executive Summary

With macroeconomic conditions normalising, the global credit landscape appears poised for greater stability in the year ahead. But there are several sources of risk that could disrupt this relatively sanguine outlook. In this piece, we explore four scenarios that, while not exhaustive, could significantly alter macroeconomic and credit conditions, and potentially have rating implications.

» President Donald Trump enacts his campaign announcements on trade, tax and immigration. Although institutional constraints and market reaction will likely temper more radical policy action, putting sweeping tariffs in place, removing millions of undocumented migrants and pushing through further tax cuts would lead to a significant and sudden increase in inflation in the US (Aaa negative). Assuming the Federal Reserve (Fed) responds to higher inflation by raising rates, this would be damaging for domestic issuers, particularly lower-rated firms, but also externally, for instance for emerging market issuers. If Trump tries to influence the Fed, that would damage institutional credibility.

» European governments face major burdens from defence spending. If the US withdrew assistance to Ukraine and peace talks were unsuccessful, the associated security risk would likely lead to a rise in risk premia across Europe. Moreover, given the low likelihood of a quick deal on a common EU debt funding tool, European governments will probably have to take on more debt directly to partly fill the gap, testing market confidence. European governments would also have to spend significantly more on their own military and defence capabilities. Spending cuts in other areas and tax rises in response could have knock-on effects for some sectors as well.

» Tensions in the Middle East trigger a broader conflict, hitting energy supplies. Despite the recent ceasefire agreed between Israel (Baa1 negative) and Hamas, following the ceasefire with Hezbollah in November, tensions remain high. There is still a real risk of a misstep leading to a prolonged conflict between Israel and Iran that would see the US getting involved. In that scenario, oil prices could jump and Iran might disrupt shipping in the Strait of Hormuz. This would hurt the global economy, leading to weaker economic activity and higher inflation.

» Shocks trigger a collapse of risk appetite. The current combination of high valuation measures and relatively low volatility already suggests that markets may not be placing enough weight on downside scenarios. If investor sentiment turned acutely negative across a range of financial markets, then asset prices would fall, credit spreads increase, and there would be significant economic disruption as a result. We would see more defaults as issuers with refinancing needs struggled to cope with higher refinancing costs.