Financial markets: IMF warns of dangers from the AI boom and national debt

Bangkok. The International Monetary Fund (IMF) warns of increased risks to financial stability as a result of the AI ​​boom and high national debt. Corporations are increasingly financing the expansion of AI with debt, and investors are buying AI shares on credit.

At the same time, government bond yields are rising. Both could lead to turbulence in the financial markets, according to the report on global financial stability that the IMF presented on Tuesday on the sidelines of the annual meeting of the IMF and the World Bank in Bangkok. The dangers are therefore closely related.

The markets are still robust - supported by solid growth and high corporate profits, the IMF economists analyze. “But this resilience does not necessarily mean security,” said Athanasios Vamvakidis, deputy director of the IMF’s Department of Monetary and Capital Markets, at the launch of the report.

Economists are particularly concerned about the massive expansion of the AI ​​infrastructure, which is increasingly being financed on credit. The investments are accompanied by the hope of higher productivity and increasing corporate profits.

If this hope is disappointed, there is a risk of disruption in the financial markets: “Weaker AI investments or lower profitability could be a shock that triggers a market correction,” warns the IMF.

The large loans taken out by AI companies threatened to intensify the shock. According to the report, this year Alphabet, Amazon, Meta, Microsoft and Oracle account for almost ten percent of all new investment-grade corporate bonds issued worldwide; in 2024 it was just 0.5 percent. The interest costs of tech companies more than doubled in the second quarter compared to the previous year, totaling almost six billion dollars.

The IMF is particularly critical of the interconnections within the industry. For example, the AI ​​hardware manufacturer Nvidia is granting major data center operators billions in financial injections so that the so-called hyperscalers can afford AI chips from Nvidia.

The IMF has evaluated 14 such circular deals since 2023. They include equity inflows worth around $300 billion and $650 billion in debt. In return, the recipients agreed to purchase cloud services or chips for $1.4 trillion in the future.

According to the IMF, these commitments are concentrated on just a few companies - with potentially major problems if one of them gets into trouble. There is a threat of “a triple blow,” said IMF economist Jason Wu. “If doubts arise about the monetization of AI, investments will lose value, debts may become difficult to service, and promised revenues may not materialize.”

The AI ​​risks are therefore also linked to the turbulence in the bond market. Since the war in the Middle East began at the end of February, government bond yields have risen worldwide - partly because of growing inflation concerns due to more expensive energy imports.

According to the IMF, term premiums for long-term bonds in industrialized countries are now at the upper end of their historical range - also because of ongoing concerns about the budget deficits of many countries.

According to the IMF, market observers also see a connection between rising returns and the AI ​​boom. With their bonds, the tech companies are competing for the same capital as states, which can increase their financing costs.

The market is worried about whether it can absorb “the huge emissions from states and increasingly from the private sector,” said Vamvakidis. A further rise in bond yields could in turn weigh on the valuation of AI stocks, warns the IMF.

The IMF is demonstrating how dangerous the interaction of risks from AI and rising bond yields can be with a stress test for 665 banks from 29 countries. In a crisis scenario, doubts about the productivity boost through AI trigger a fall in the price of technology stocks.

The IMF economists also assume that share prices will fall by more than a quarter over three years. In the scenario, the yields on long-term bonds rise by three percentage points, and oil and raw materials become more expensive by more than half.

Overall, the IMF believes that the banking system would remain sufficiently capitalized in such a situation. But banks, which account for 22 percent of the world's total assets, fell below a common equity Tier 1 capital ratio of seven percent. This would mean you would be considered weak. A year ago, banks with 18 percent of global balance sheet total slipped below the corresponding core capital ratio in the stress test.

In the new test, institutions with seven percent of total assets would even fall below the minimum ratio of 4.5 percent and would need a total of $68 billion in fresh capital. According to the IMF, Asian banks are losing the most capital because the region is heavily dependent on imported oil and gas. Europe's banks follow behind.

The IMF sees the threat of cyber attacks as a further danger to the financial system, which it rates higher than in April. In more than 70 percent of reported cases this year, software manufacturers had virtually no time to patch a security hole before attackers exploited it, the fund warns. In 2021, there were usually almost 300 days left for this.

“A serious incident could severely disrupt payments, trading, access to deposits or other critical financial services,” write the organization’s economists. “The danger is particularly acute when an attack hits a large financial institution, payment system, cloud provider or software platform, allowing the disruption to spread across an increasingly interconnected financial system.”