10 April 2026: The war in Iran risks triggering a 2008-style financial crisis, warns Bank of England chief

Bank of England Governor Andrew Bailey has said that the war in Iran risks worsening the multitrillion-dollar private credit crisis and triggering a wider economic meltdown.

Bailey highlighted a potential “double whammy” for the global economy, driven by growing strain on private credit and financial market volatility stemming from the US-Israel-Iran conflict.

Speaking to the European Parliament’s Committee on Economic and Monetary Affairs in Brussels yesterday, Bailey said decision-makers needed to remain “very focused” on that dual risk, even amid a fragile truce in the Iran conflict this week.

“We’ve got volatile markets,” he said. “What if that coincides with one of these other things, let’s say private credit, becoming a much bigger problem?”

Bailey, speaking in his capacity as chair of the International Financial Stability Board, has previously warned of a growing risk of a 2008-style market meltdown due to turmoil in the private credit market.

Last October, he told a House of Lords committee that it remained an “open question in the US” whether the implosions of subprime auto lender Tricolor and auto parts manufacturer First Brands reflected a deeper problem for the US economy or were simply confined to private finance.

Yesterday, he suggested wider problems may be emerging in the private credit space. The sector, he said, “has not yet, because of its relative newness, actually come under stress. We may be seeing that now.”

He said the sector, which market estimates put at about $3 trillion by the end of last year, was “relatively opaque,” and that doubts about the space could spiral into wider challenges.

“There is a risk that when investors start to observe more of these instances of financial failures, it raises a bigger question about their confidence in the system as a whole,” he said.

Prominent voices, including JPMorgan’s chief executive, Jamie Dimon, have also expressed scepticism about the health of the private credit system. In October, Dimon described “cockroaches” at play in the sector and said it could face problems beyond the Tricolor and First Brands meltdowns.

“When you see one cockroach, there are likely to be more,” he said.

The outbreak of war in Iran has roiled financial markets, potentially delivering a significant blow to the UK economy.

Chancellor Rachel Reeves has been urged to launch a sweeping review of the UK tax system to improve growth prospects and boost investment.

Researchers at the OECD said the UK economy suffered from distortions in its tax system and from loopholes exploited by businesses.

A new report has called on Reeves to launch an “in-depth tax review to make the tax system more efficient and growth-friendly”.

The main recommendation was to broaden the VAT base, which would, for example, end the debate over whether Jaffa Cakes are biscuits or cakes.

It said any extra receipts could be used to compensate low-income households through “targeted transfers”.

Increasing numbers of businesses are seeking protection against bad debt as they navigate tough trading conditions, according to SME funder Bibby Financial Services.

BFS’s latest SME Confidence Tracker reveals that the average amount SMEs are owed in unpaid invoices is £66,770, a 10% increase year-on-year. 30% have written off an average of almost £30,000 due to customer insolvency or payment default.

In response to these risks, demand for protection is rising. 60% of all BFS’s new business prospects in 2025 opted to include Bad Debt Protection (BDP) as part of their overall funding package.

Crucially, SMEs are increasingly choosing to protect their entire sales ledger rather than selectively covering only a few customers. This suggests payment risk is spread more widely across supply chains, rather than limited to a few struggling firms.

Derek Ryan, CEO for North West Europe at Bibby Financial Services, said: “Economic pressures are driving caution among many businesses who are urgently seeking ways to protect against insolvency and protracted default of customers, so we have seen a significant increase in funding applications that include bad debt protection.

For many, it’s no longer about simply protecting against one or two problematic debtors, and we are seeing more SMEs covering their entire sales ledger, which indicates the extent of supply chain pressures today.”

Figures reflect the growing financial pressures facing SMEs across the UK, with some being forced to fold. UK Government statistics for February 2026 show corporate insolvencies for the month hitting 1,878, a 7% rise from January. However, bad debt is no longer confined to businesses on the brink of insolvency.

Sterling’s rally yesterday to a high of 1.3458 looks increasingly fragile as the Iran/U.S. ceasefire appears to be constantly on the brink of collapse.

Traders are increasingly wary of taking positions as further news breaks almost hour by hour. The pound eventually fell back, closing at 1.3381.

U.S. inflation rose as expected in February and is likely to increase further in March amid the war with Iran. This trend is expected to discourage the Federal Reserve from cutting interest rates for a while.

The personal consumption expenditures price index rose 0.4% after an unrevised 0.3% gain in January, the Commerce Department's Bureau of Economic Analysis (BEA)said on Thursday. Economists polled by Reuters had forecast the PCE price index rising 0.4%.

The BEA is still catching up on data releases after delays caused by last year's government shutdown. Inflation was already elevated before the war, largely due to President Donald Trump's import duties.

The U.S.-Israel war with Iran boosted global oil prices and sent the national average retail gasoline price soaring above $4 per gallon for the first time in more than three years.

Economists expect the inflation fallout from the conflict, which started at the end of February, to be more pronounced in March's data. Trump on Tuesday announced a two-week ceasefire on the condition that Tehran reopen the blockaded Strait of Hormuz, which has also affected shipments of fertilisers and other goods. The disruptions are expected to raise food prices.

Excluding the volatile food and energy components, the PCE price index increased by 0.4% in February, matching the previous month's ​rise for a third straight month. In the 12 months through February, PCE inflation advanced 3.0%, following a ​3.1% increase in January.

The slowdown in year-on-year core PCE inflation reflected last year's high readings dropping out of the calculation. The Federal Reserve tracks PCE measures to meet its 2% inflation target.

Economists say monthly PCE inflation needs to increase by 0.2% for a sustained period to bring inflation back to target. Minutes of the Fed's March 17-18 policy meeting, released on Wednesday, showed a growing group of Federal Reserve policymakers believed that interest rate hikes might have been needed last month to counter inflation.

GDP expanded at an annual rate of 0.5% in the fourth quarter of 2025, according to the BEA’s third estimate released yesterday. This release followed the 0.7% growth announced in the previous estimate and came in below the market's expectation of 0.7%.

"Real GDP was revised down by 0.2 percentage points from the second estimate, primarily reflecting a downward revision to investment," the BEA explained in its press release.

The Minutes from the Federal Reserve’s March meeting, released on Wednesday, reinforced the idea that the Fed is firmly in wait-and-see mode, while there is a growing recognition that risks are becoming more balanced.

Policymakers broadly agreed that keeping rates steady was the right call, with almost all participants backing no change in March. At the same time, many saw policy already within a plausible neutral range, suggesting the bar for further tightening remains relatively high.

White House economic adviser Kevin Hassett said yesterday that he is confident Kevin Warsh will assume the role of Federal Reserve chairman in May, signalling a potential leadership transition at the US central bank.

Speaking to Fox Business Network, Hassett stated, "I'm highly confident that it will happen”.

He added that preparations for the confirmation process are progressing, noting that a hearing for Warsh is likely to begin as early as next week, which already marks a delay from previous estimates.

Hassett’s remarks suggest growing certainty within the administration regarding the timing and direction of the Federal Reserve’s leadership change, with Warsh positioned as the preferred successor.

The dollar index fell as the truce between the U.S. and Iran came into force, despite several compliance issues on both sides. The index fell to a low of 98.63 and closed at 98.81.

French Finance Minister Roland Lescure said the impact of the war in Iran on the economy is moderate for now, and growth is on track to meet the government’s expectations if the conflict doesn’t worsen.

“At this stage, the impact on growth is relatively moderate, but it will all depend on how the conflict evolves,” he said on Franceinfo radio yesterday. “If this crisis fades in the coming weeks, we will remain in sync.”

Before the outbreak of the conflict in the Middle East, the Government forecast a 1% expansion in the 2026 budget bill. The Banque de France has since reduced its growth prediction, but only slightly to 0.9%.

Lescure said the cost of the conflict for public finances is likely to be significant at around €4.8 billion this year. Still, he repeated that the Government intends to keep the deficit within its target of 5% of economic output and will present a more detailed assessment of the economic and financial impact of the war by April 21.

More than 20% of young Germans are set to emigrate as the country’s economic situation worsens, a report has found.

Research published in the academic journal Forschung und Lehre indicates that 21 per cent of young people aged 14 to 29 are actively planning to leave the country.

A further 20 per cent say they are currently considering the option, with economic difficulties cited as a major push factor.

The report also found that young people report substantial levels of stress, exhaustion, and anxiety.

“The results of the trend study dramatically show how much the pressures of recent years are affecting young people – in the form of stress, exhaustion and growing lack of prospects,” said Simon Schnetzer, who directed the study.

This week’s report comes amid growing fears about the state of the German economy, with the ongoing energy crisis accelerating deindustrialisation and affecting its major manufacturing sectors.

The ceasefire in the Iran war may have eased soaring oil prices, but perhaps not the European Central Bank’s interest rate increases this year. Before the war, the ECB had been expected to keep rates steady in 2026.

However, the war-driven surge in energy prices revived inflation concerns, prompting financial markets to quickly revise expectations to as many as three rate hikes this year.

With the ceasefire, interest rate swap markets, where investors trade expectations for future interest rates, have repriced significantly, with investors now predicting roughly two hikes.

Dutch central bank chief Olaf Sleijpen offered a less hawkish view at a news conference on Monday, saying that risks to the Eurozone inflation outlook are balanced and that current interest rates are appropriate. However, he did go on to say that the Governing Council will not hesitate to act should core inflation begin to increase.

The euro rallied to a high of 1.1723 as markets showed confidence in the Iran/U.S. ceasefire, but that sentiment was short-lived, and the common currency fell back to close at 1.1699.

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