IMF Warns AI Share Crash Could Threaten Global Financial Stability

IMF Flags Elevated Risks from AI Boom

The International Monetary Fund has warned that the threat of an AI share price crash rippling out across global markets is putting world financial stability at risk. In its twice-yearly Global Financial Stability Report, the IMF highlighted the sky-high valuations for AI companies along with their increasing debt pile as one reason that risks in the system are "elevated".

"The consequences of an AI correction could be global," the fund warned. Aside from the US, Asian markets would be most exposed, while the UK and euro area could be more insulated, though investors with US holdings would still be hit.

Concentrated Exposures and Growing Leverage

Athanasios Vamvakidis, deputy director of the IMF's monetary and capital department, said the exposure of the rest of the world to US assets, particularly AI, is the highest it has ever been. "So this is supporting the global economy through wealth effects today; but if we get a market correction it could have broad implications," he said.

The IMF's analysis underlined the interconnected nature of big AI companies and the high levels of borrowing funding investment in the sector. The "magnificent seven" big tech stocks, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, account for more than 35% of the S&P 500 share index in the US, up from 12% a decade ago, and their total market capitalisation has increased by more than 50% in the past two years.

Three Salient Risks to Stability

An AI crash was one of three "salient risks" identified by the IMF, alongside rising government borrowing costs and the threat of a big cyber-attack. The fund called this trio of factors "plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil".

The IMF also pointed to "growing evidence" that the successful rollout of AI "may not require investment on the massive scale" being undertaken by hyperscaler firms such as Amazon Web Services, Google, Meta and Oracle, and that "potential economic gains may not be as large as expected".

The fund identified $300bn worth of transactions between hyperscalers and "weaker AI firms" in the past three years, supplemented by $650bn in debt, in exchange for $1.4tn in future financial commitments. It warned that growing leverage from company debts, hedge fund investment and retail borrowing could heighten the potential for forced selling and surges in equity volatility in the event of an AI-led downturn.

Sources: theguardian.com