AI borrowing binge rattles US markets
NEW YORK: The world’s richest companies can no longer rely on their massive cash piles alone to stay in the artificial intelligence race and have suddenly started borrowing massively in a shift that is sending repercussions across the world.
Artificial intelligence firms are increasingly relying on borrowing to fuel their growth, causing ripples across global financial markets, according to a surge in corporate debt. In the past nine months, tech sector borrowing has risen to approximately US$500 billion, with major players like Google, Meta, Amazon, and Microsoft leading the charge.
This borrowing binge is driven by rising US interest rates, which have sent shockwaves through the financial world. Goldman Sachs predicts a further increase in AI-related borrowing to US$1.2 trillion in 2027.
James Vrachas, executive director of fundraising advisory firm Post Oak Group, notes that AI now accounts for 25% of all corporate bond issuance, up from just four% two years ago. In inflation-adjusted terms, the AI sector is expected to borrow more this year than US cable operators did to build the entire internet or than railroad companies during the 19th-century US rail boom.
Investors have eagerly lent to these tech giants, but now demand higher returns, even from once-stable companies like Meta, which has to offer more than 7% annually. The impact of this borrowing spillover extends beyond the AI firms themselves, as their debt may be crowding out demand for US government bonds, which in turn drives up borrowing costs for the US government. This has led to the 10-year US Treasury bond interest rate surpassing 5.30%, its highest level since 2002.
The volatility surrounding AI debt has also caught the attention of some investors, who question the risks of betting on an AI boom that could stall, similar to the dot-com bubble in 2000. The Bank of England's Financial Policy Committee has warned of a potential "sharp correction" in financial markets, particularly if concerns about AI development or adoption affect earnings expectations.
Oracle, a cloud specialist with US$125 billion in debt and shrinking cash reserves, serves as a potential bellwether for the AI finance landscape. A problem with its debt could trigger contagion across the entire AI sector, according to Mark Malek, chief investment officer at Siebert Financial.
Written by urgent.news from New Straits Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
