US tech firms may crowd out others in euro bond market and raise credit risk

U.S. tech giants, Google, Amazon, and Microsoft, are significantly increasing their presence in the euro zone bond market by investing heavily in AI technology, according to a European Central Bank blog post. These companies, known as hyperscalers, could allocate up to $1 trillion towards AI-related investments by 2028, potentially crowding out other borrowers and driving up financing costs for governments and raising credit risks, analysts suggest.

Although U.S. tech firms hold only about €40 billion worth of bonds in the euro zone, they account for nearly 10% of new issuance, with Amazon and Alphabet leading the pack in corporate issuances this year. The blog argues that the influx of U.S. tech debt into the bond market could raise borrowing costs for various sectors, with potential repercussions on the sovereign and supranational bond markets.

The sharp increase in new debt from big tech companies may challenge investor appetite, while a larger supply of bonds may exacerbate this effect, potentially causing borrowing costs to rise. The blog also warns that the high credit ratings assigned to these firms' debt may be overly optimistic, as rating agencies' assessments could be based on optimistic assumptions about future revenue growth and leverage, increasing vulnerability to mispricing of credit risk.