"Credit Risk May Pose a Greater Threat Than the Iran Risk" [US-Iran War]

Another Wave of Instability Building in Financial Markets

iM Securities: "March Will Be a Critical Inflection Point"

Following the large-scale US-Israel military operation against Iran, international oil prices have become volatile and tensions are rising across global financial markets. However, some analysts argue that more attention should be paid to the recent surge in credit risk rather than the Iran risk itself.

It is suggested that the US military actions against Iran were somewhat anticipated. President Trump has repeatedly sought to resolve external risks through military force, and with the midterm elections approaching, it is highly likely that this stance will be maintained for the time being.

Iran Risk: Controllability Due to Overwhelming US Military Power

On March 3, Park Sanghyun, a researcher at iM Securities, outlined three scenarios that the financial market should prepare for in light of this situation.

In the optimistic scenario, as was the case with the US attack on Iran's nuclear facilities in June last year (the so-called "Midnight Hammer Operation"), military conflict would end quickly and the spike in oil prices would be temporary.

The neutral scenario would involve continued military clashes, but thanks to the overwhelming military power of the US, the Strait of Hormuz would not be blocked. While oil price volatility would increase, the direct impact on the global economy would remain limited.

The pessimistic scenario envisions fierce resistance from Iran leading to a prolonged military conflict and the blockade of the Strait of Hormuz. In this case, persistently high oil prices could recreate the inflation shock that followed the Russia-Ukraine war in 2022. The Strait of Hormuz is a strategic passage through which about 20% of the world's oil shipments pass.

Among these, Park believes the neutral scenario is the most likely. President Trump himself stated he "planned to conduct attacks for about 4–5 weeks," and with the midterm elections ahead, a prolonged conflict would be a burden both in terms of public approval and inflation. In fact, current oil prices are lower than during the Hammer Operation in June last year, indicating that the market is not yet considering the pessimistic scenario as its baseline assumption.

Is the More Urgent Risk 'Credit'?

While the Iran situation is unfolding, other types of risk factors are accumulating in the financial markets.

On February 25, UK mortgage provider Market Financial Solutions (MFS) filed for administration. MFS specializes in buy-to-let property loans and short-term bridge loans (high-interest, short-term loans used when quick funding is needed), with total loans amounting to 2.4 billion pounds (about 4.7 trillion won).

The main issue was not the bankruptcy itself. During the administration process, suspicions of "double pledging" surfaced—meaning assets already pledged as collateral were pledged elsewhere as well. Similar concerns emerged during the bankruptcies of US auto parts company First Brands and subprime auto lender Tricolor Holdings in November last year.

Following this news, the KBW Index, a leading US banking sector ETF, plunged 5.8% intraday. This was the steepest intraday decline since President Trump announced reciprocal tariffs in April last year. Shares of major global asset management firms, such as BlackRock and Apollo Global Management, which manage private credit funds, also fell in tandem. Jamie Dimon, CEO of JPMorgan Chase, recently warned that "signs similar to those before the 2008 financial crisis are beginning to appear."

The impact of credit concerns is now spreading to big tech companies. Credit default swaps (CDS)—an insurance-like indicator against corporate defaults—for major AI firms such as Google, Amazon, Microsoft, and Oracle have recently climbed again, surpassing previous highs. This is the result of unresolved doubts about AI investment profitability and concerns over the health of the private credit market, now compounded by the credit shock originating from the UK.

Although a full-blown credit crisis has not materialized, it is hard to deny that warning signals are sounding in multiple areas simultaneously. Park commented, "If the geopolitical risks stemming from Iran persist and high oil prices become prolonged, credit risk could further intensify or spread."

However, if developments follow the previously suggested 'neutral' scenario and geopolitical risks subside in March, there is a high likelihood that President Trump will strengthen various liquidity policies and stimulus measures to stabilize the US financial markets. Park stated, "For the US and other global financial markets, March is likely to serve as a major turning point."

This content was produced with the assistance of AI translation services.