Three key phases of major credit cycle: Map of what's to come

THE impact of Covid-19 - and the speed of its disruption to society and markets - is unprecedented. It is clear that we are at the start of a major, connected credit cycle. We expect this cycle will be as bad or worse than the Global Financial Crisis of 2008-09 (GFC).

The GFC was about the fragility of the financial system at that point in time. The current crisis is a physical disruption - a sudden stop - and there remains an open question about the depth of this event, which is driven by the open question around the duration of physical disruption. As we're still in the early stages, though, the range of potential outcomes remains wide.

We believe in many ways this is closer to an absolute black swan than what happened in the GFC based on the lack of time to adjust and the speed of escalation. This is important because it brings into focus downside scenarios that weren't considered even in the more draconian cases of prudent risk-taking. It goes beyond any downside case people were reasonably modelling.