Basel Sounds the Alarm: the AI Boom Is Built on Debt

The institution that bankers call the central bank for central banks has rarely been in the business of cheerleading, and on Sunday it was not. In its Annual Economic Report, published as the world's monetary officials gathered for the Bank for International Settlements' annual meeting in Basel, the BIS warned that the torrent of money pouring into artificial intelligence has the hallmarks of a boom that ends badly — and that the global economy has quietly become dependent on it.

The argument is not that AI is a fraud. It is that the financing behind it has grown fragile. Spending on chips, data centres and the power to run them has become one of the main engines of growth in the United States, and a sudden loss of confidence — a few disappointing earnings calls, a stretch of weak returns — could pull that engine into reverse. The bank's economists have a name for the danger: a “lengthy investment bust” whose damage would not stay confined to Silicon Valley.

An engine that may be running on borrowed time

The numbers the BIS marshals are striking precisely because they sound modest. AI-related investment now runs at roughly 1 percent of American GDP — comparable in scale to the shale-oil boom of the mid-2010s and around half the surge in technology spending at the height of the dot-com era. Yet because so much else in the economy is sluggish, that sliver carries an outsized load: outlays on data centres and semiconductor plants have added something on the order of 0.4 percentage points to US growth each year since 2022. Strip the build-out away, and the picture of American resilience looks a good deal thinner.

What unsettles the BIS is less the size of the bet than the way it is being funded. Earlier this year the bank's researchers noted that gross bond issuance tied to the AI build-out topped $100 billion in 2025, as the cash-rich giants of the sector increasingly reached for debt and for “complex funding structures” that braid the technology companies together with private-credit funds and other non-bank lenders. The more the boom leans on borrowed money, the report argues, the more a downturn in one corner can ricochet through the financial system.

A new fault line in government debt

The AI warning sits inside a broader and gloomier survey. The BIS devotes much of the report to what it calls a new fiscal-financial stability nexus: public debt is at or near record highs across the rich world, and the sovereign bond markets that finance it are now dominated by large, highly leveraged players — hedge funds in particular — whose presence can turn an ordinary sell-off into a rout. The result, the bank cautions, may be more frequent and sharper drops in the value of government bonds, the very assets that are supposed to be the bedrock of the system.

Layered on top is inflation that has proven stubborn, kept alive in part by the supply shocks of recent months, and governments whose room to respond to the next crisis has narrowed after years of heavy borrowing. The prescription is austere and familiar: guard price stability, repair the public finances, extend supervision beyond the banks to the fast-growing world of non-bank finance, and push the structural reforms that lift growth without lifting debt.

Policymakers must act now. Delay will only make the necessary adjustments more costly.

That was the message from Pablo Hernández de Cos, the BIS general manager, who framed the report less as a forecast of doom than as a plea to use the present calm to prepare for a storm.

Why Luxembourg should read the small print

For a country that lives off the management of other people's money, the report is not abstract. Luxembourg is the world's second-largest fund domicile, home to several trillion euros in assets, and those assets are steeped in exactly the things the BIS flags: American technology shares riding on AI expectations, and the sprawling network of non-bank finance — investment funds, private-credit vehicles — that the report singles out as the system's least-watched corner. A drawn-out AI correction would not announce itself in Luxembourg. It would arrive through fund valuations, through redemptions, through the plumbing.

None of this is a prediction that the boom will break tomorrow. The BIS is careful to say that AI may yet deliver the productivity gains its champions promise, and that the spending could prove money well spent. Its point is narrower and harder to dismiss: an economy that has come to rely on a single, debt-financed bet should know what it is standing on. After a year in which markets shrugged off almost everything, Basel's annual exercise in worry is a reminder that the ground is not as solid as the share prices suggest.