Article by Jordi Pumarola Batlle
In simple terms, the credit market is the system of lending and debt that keeps the economy running.
It includes, for example:
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money borrowed by companies
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government and corporate bonds
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bank loans
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funds that invest in debt instruments
In other words, it’s not the stock market itself — it’s the pipeline through which money flows.
A simple way to understand it:
the stock market is the storefront
credit is the electrical system of the building
If the storefront breaks, it looks bad.
If the electrical system fails, the entire building can shut down.
Why is it so important?
Because many companies don’t operate solely on what they sell. They also rely on:
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refinancing existing debt
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accessing new credit
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paying salaries
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investing in growth
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managing cash flow pressures
When credit conditions are healthy, all of this functions smoothly.
But when credit tightens:
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borrowing becomes more expensive
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banks and investors become more risk-averse
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access to financing becomes more difficult
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weaker companies start to struggle
And when this happens across the system, it can impact:
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businesses
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consumption
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employment
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and ultimately, equity markets
What does it actually mean for credit to “break”?
It doesn’t mean the system collapses overnight.
It means early warning signs begin to appear — signals that financial conditions are tightening too much.
For example:
1. Borrowing becomes significantly more expensive
If a company that previously financed itself at reasonable costs suddenly faces much higher rates, its margins get squeezed.
In practical terms:
It’s like a household moving from an affordable mortgage to a much higher monthly payment.
It may hold for a while.
But if it persists, problems start to surface.
2. Some companies can no longer service their debt
This leads to:
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defaults
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bankruptcies
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losses for funds and financial institutions
If this starts to scale, markets begin to react.
3. Investor confidence deteriorates
And when confidence weakens in the debt market, a critical dynamic emerges:
no one wants to be the last one holding the risk.
As a result:
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investors rush to exit positions
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debt instruments are sold off
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capital is withdrawn from funds
This accelerates systemic stress.
4. Fraud or poor practices come to light
In periods of stress, hidden weaknesses often surface:
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mispriced or misunderstood products
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excessive leverage
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opaque financial structures
And there is one key principle:
In finance, confidence is everything.
Once it erodes, the system can deteriorate rapidly.
Why is this more dangerous than a war?
Because geopolitical conflicts tend to generate:
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fear
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alarming headlines
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spikes in oil prices
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short-term market reactions
But in many cases, these effects are temporary.
A credit crisis, however, strikes at the core of the system.
It directly impacts the mechanism that allows companies, banks and investors to function.
A simple comparison:
a war is like a storm on the road
a credit crisis is like an engine failure
The storm is uncomfortable.
The engine failure leaves you stranded.
Why can this bring the market down?
When credit conditions deteriorate, investors start pricing in real economic consequences:
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lower corporate earnings
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increased risk of defaults
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slowing economic activity
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potential recession
And this is a key distinction:
Markets can fall due to fear.
But they truly decline when fundamentals weaken.
This is what analysts refer to as an endogenous risk — a risk that originates from within the financial system itself.
What signals do professionals monitor?
Without getting overly technical, professional investors typically watch for signs such as:
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highly leveraged companies showing increasing stress
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rising default rates
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funds facing liquidity constraints or gating withdrawals
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sharp increases in U.S. Treasury yields (especially the 10-year)
The idea is simple:
If these indicators deteriorate, systemic risk increases.
The “cockroach theory”, explained simply
There is a well-known concept in finance, often referenced by JP Morgan.
It states that if you see one cockroach, there are usually more hidden.
Applied to markets:
If you start seeing isolated cases of:
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distressed funds
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defaults
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fraud
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unusual financial stress
it may not be an isolated issue.
It could be the first visible sign of a broader underlying problem.
That doesn’t mean things will necessarily spiral — but it does mean closer attention is required.
What should an investor do in this context?
The answer is not to react — but to understand.
Some key principles:
1. Don’t overreact to headlines
Not every shock signals a structural problem.
2. Understand that real risk is not always visible
What dominates the news cycle is not always what matters most.
3. Focus on economic fundamentals, not political noise
Credit conditions, interest rates and corporate health matter more than geopolitical narratives.
4. Don’t confuse volatility with collapse
A volatile market is not necessarily a broken market.
Reflection
Iran, wars or geopolitical tensions can create noise.
But they don’t necessarily break the market.
What can truly break it is something far less visible:
a breakdown in the credit system.
Because when credit deteriorates:
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borrowing becomes more expensive
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companies and funds come under pressure
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confidence weakens
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economic activity slows
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and equity markets eventually reflect that reality
In one sentence:
The real risk is not market fear — it’s a disruption in the financial engine that keeps the economy moving.