AI Bust Risks Ripple Effects From Growth to Credit, BIS Says

u9giepkhe0x(edo)jp6x3(bw_media_dl_1.png Source: BIS

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(Bloomberg) — An artificial-intelligence bust, inflation and fiscal stress are among the most alarming threats to global prosperity at present, the Bank for International Settlements warned.

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In its annual report published on Sunday, the Basel-based institution cited those on a list of “pressure points” that currently “demand attention,” with underlying financial vulnerabilities lurking that could amplify any shock.

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“The global economy remains caught in the crosscurrents of progress and peril,” Basel officials said in the report. “Resilience is being increasingly tested and strained.”

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The assessment highlighted AI-led risks prominently in a report that arrived on the eve of the European Central Bank’s three-day annual symposium in Sintra, where a host of global policymakers will also scrutinize such stability dangers closely.

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“Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions,” the BIS said, before observing that “a major equity-market correction could have larger macroeconomic consequences today than in the past.” 

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The Basel officials went on to note that other assets could face similar dangers, and highlighted credit in particular.

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“Repricing of risk this time, whether triggered by higher interest rates or an AI bust, has the potential to be similarly disruptive” in that segment to the 2008 Global Financial Crisis, the BIS said. 

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On AI specifically, officials highlighted vulnerabilities linked to funding, including complex arrangements such so-called “circular financing” deals that can mix equity and debt with supplier-client contracts. 

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For instance, chipmakers and hyperscalers take stakes in AI labs or neocloud providers, who in turn commit to multi-year purchases of chips or computing power, the BIS said. Data center construction is more frequently outsourced to third parties that lease facilities back to hyperscalers on long-term contracts with embedded exit clauses.

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“The terms of such deals are typically poorly disclosed, with risks of the same asset being pledged multiple times,” officials wrote.

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The BIS’s separate warning of a possible return of inflation jars with some initial optimism that the current energy shock caused by the Middle East crisis might recede. Signs of progress over a peace deal this week brought the oil price down to levels below where they were when the Iran war broke out in late February.

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BIS officials, in tune with peers at institutions such as the ECB, worry that the disruption to energy supplies may not be over, that infrastructure will take time to rebuild, and that existing impacts could linger.