The Bank of England warned that a multi-trillion dollar spending boom in artificial intelligence infrastructure financed by debt risks unraveling given \u201cmaterially stretched\u201d stock market valuations.<\/p>\n
The UK central bank said on Tuesday that a correction in AI stocks would spill over to wider debt markets and pointed to early warning signs in credit default swaps of companies leaning on debt to fund their investments.<\/p>\n
While currently investment in the technology is mostly driven by cash held by \u201chyperscalers,\u201d it said around half of the expected $5 trillion of AI spending over the next five years will be financed externally, largely through debt.<\/p>\n
In its twice-yearly Financial Stability Report, the BOE said that a sharp fall in stock valuations could hit UK household wealth, feeding through to consumer spending. It would also trigger losses on lending to firms investing heavily in AI infrastructure, ramping up borrowing costs for companies more widely.<\/p>\n
It\u2019s the latest warning about a possible AI bubble collapsing, with some drawing parallels with the dotcom boom that burst in stock markets in the early 2000s. As concerns build that valuations are reaching irrational levels, firms are investing heavily in AI infrastructure, such as building out the data centers needed for the technology.<\/p>\n
However, BOE Governor Andrew Bailey said AI-focused firms are at least recording positive cash flows, unlike the early internet companies.<\/p>\n
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\u201cThey are not created on hope but as we see and we were seeing it last week, I think in the debate is Google moving onto Nvidia\u2019s patch, it doesn\u2019t mean to say everybody\u2019s going to win. It doesn\u2019t mean to say everybody\u2019s going to win equally,\u201d he told a press conference in London.<\/p>\n
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The BOE estimates that AI has driven two thirds of this year\u2019s gains on the S&P 500 index and investment in the technology was behind half of US economic growth in the first half of 2025.<\/p>\n
\u201cThe financing of AI development is reaching an inflection point,\u201d the BOE said. \u201cIf material credit losses on AI lending were to occur (directly or indirectly), this could have spillovers to broader credit conditions including in the UK.\u201d<\/p>\n
The central bank said there has recently been rising corporate debt issuance by AI companies and pointed to some warning signs building.<\/p>\n
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\u201cThe five-year credit default swap spreads of Oracle \u2013 an AI company which has lower free cash flow margins than some other larger hyperscalers and has issued a large amount of debt this year to finance AI infrastructure spending \u2013 has widened from less than 40 basis points to around 120 basis points since end-July,\u201d it said.<\/p>\n
That contrasts with the steady spreads of US investment-grade corporates more broadly. Credit default swaps insure against a company defaulting on its debts.<\/p>\n
Oracle Corp., the database and cloud giant that\u2019s a major client of Nvidia Corp., has emerged as a barometer for AI risk. Skeptics have piled into its credit-default swaps as a hedge against a crash, betting that CDS prices will rise as investor sentiment on the tech cools.<\/p>\n
Nvidia is the world\u2019s most valuable company with a market capitalization of $4.37 trillion. Its share price has been driven by demand for its chips, used to power the most cutting-edge AI models.<\/p>\n
It has struck billions of dollars of deals over the past year to shore up its own customers, partners and even its rival Intel Corp. Those tie-ups have raised concerns of an AI bubble, with the deals inflating the market and tying the fates of several players together.<\/p>\n
\u00a9 2025 Bloomberg<\/p>\n
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