BIS warns AI bust could match 2008 credit disruption, flags record debt and inflation dangers

Multiple pressure points

The BIS Annual Economic Report, published Sunday, identifies four main risks: resurgent inflation, AI investment fragility, financial vulnerabilities, and record sovereign debt. Economic activity remains resilient, but the central bank umbrella group warns that disciplined policymaking is critical.

Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success depends on sound fiscal and financial foundations.

AI exuberance and circular financing

The BIS draws a direct comparison between an AI bust and the 2008 financial crisis. Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with knock-on effects on financial conditions. It highlights "circular financing" where chipmakers and hyperscalers take equity stakes in AI labs that then commit to multi-year chip purchases, with poorly disclosed terms and assets possibly pledged multiple times. The five biggest hyperscalers are expected to invest more than $1tn from 2025 to the end of 2026, and the BIS sees historical parallels in the canal and railway manias and the dotcom bubble.

A major equity-market correction could have larger macroeconomic consequences today than in the past.

Debt and fiscal stress

Record-high public debt is another flashpoint. The BIS’s Frank Smets warns that sovereign bonds are now increasingly held by highly leveraged hedge funds, creating a feedback loop between government finances and financial stability. This could lead to sharper and more frequent bond sell-offs and rapidly deteriorate financing conditions. De Cos calls for urgency in reducing debt levels in major economies.

Inflation and supply shocks

Inflation has picked up again, and the BIS cautions that more frequent supply disruptions could entrench higher inflation expectations. De Cos says the memory of the 2022 cost-of-living shock raises the probability of second-round effects from the current Middle East energy disruption, though the US-Iran ceasefire and Strait of Hormuz reopening are good news that avoid extreme scenarios, while oil-market normalisation will take time.

Credit market vulnerabilities

Corporate credit spreads near a century low and record-high share prices have drawn tech groups into huge debt and equity issuance. SpaceX’s blockbuster $86bn IPO and a subsequent $25bn bond sale prompted Allianz’s investment chief to warn of bubble territory. The BIS says that a repricing of risk, whether from higher rates or an AI bust, could be as disruptive to credit as 2008.