Threat of AI share crash puts world financial stability at risk, says IMF

The International Monetary Fund (IMF) has warned that the threat of an AI share price crash rippling across global markets is putting world financial stability at risk. In its twice-yearly Global Financial Stability Report, the IMF highlighted sky-high valuations for AI companies and their increasing debt as reasons why risks in the system are elevated. It warned that the consequences of an AI correction could be global, with Asian markets most exposed aside from the US, while the UK and euro area are potentially more insulated, though investors with US holdings would be hit. Athanasios Vamvakidis, deputy director of the IMF's monetary and capital department, said that the exposure of the rest of the world to US assets, particularly AI, is the highest it has ever been, supporting the global economy through wealth effects today but potentially having broad implications if a market correction occurs. The IMF identified an AI crash as one of three salient risks, alongside rising government borrowing costs and the threat of a big cyber-attack, calling them plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil. The analysis underlined the interconnected nature of big AI companies and high borrowing levels, warning that weaker investment and profitability could trigger a correction exacerbated by rising leverage, concentrated exposures, and circular financing arrangements. The magnificent seven big tech stocks account for over 35% of the S&P 500, up from 12% a decade ago, with total market capitalization increasing by more than 50% in the past two years. The IMF also warned of growing evidence that successful AI rollout may not require massive investment by hyperscaler firms and that potential economic gains may not be as large as expected. It highlighted growing leverage, including soaring debts by companies, hedge fund investment, and retail investors borrowing to speculate in AI stocks, which could heighten forced selling and equity volatility. Circular financing deals worth $300bn between hyperscalers and weaker AI firms, supplemented by $650bn in debt for $1.4tn in future commitments, were identified. In London, Nikhil Rathi, CEO of the UK's Financial Conduct Authority, urged small businesses to take out insurance against AI-related cybersecurity threats.

(Source：the Guardian)