IMF Warns an AI Share-Price Crash Could Threaten Global Financial Stability, With Circular Financing and Leverage as Amplifiers

On October 13, the International Monetary Fund released its twice-yearly Global Financial Stability Report, and The Guardian reported on the AI parts. The main judgment is that the threat of an AI share-price crash rippling across global markets puts world financial stability at risk, and that risks are "elevated". In the report's words: "The consequences of an AI correction could be global." Beyond the US, Asian markets would be most exposed, the UK and euro area may be somewhat insulated, and investors with US holdings would still be hit. IMF deputy director Athanasios Vamvakidis said at the launch that the rest of the world's exposure to US assets, particularly AI, "is the highest it has ever been". It supports the global economy through wealth effects today, he said, but a market correction could have broad implications.

The IMF listed three "salient risks": an AI correction, rising government borrowing costs, and a big cyber-attack. It called these "plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil". On AI itself, the report stresses how tied together the big AI firms are, and how much borrowing funds the investment boom. It says weaker or less durable AI investment and profits could trigger a correction in AI-related asset prices, made worse by rising leverage, concentrated exposures and "circular financing" deals. Such a reassessment would "sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers". Concentration is part of the backdrop. The "magnificent seven" of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla make up more than 35% of the S&P 500, up from 12% a decade ago, and their combined market value has risen by more than 50% in two years.

The report is most specific about leverage and circular financing. Leverage comes from three places: soaring debts that the companies themselves have taken on, hedge fund investment in the sector, and retail investors borrowing to speculate on AI stocks. In an AI-led downturn, these raise the chance of forced selling and surges in equity volatility. Circular financing means deals that tie stronger AI firms to weaker partners in the same sector, and they could make a price correction hit harder. The IMF gives these numbers: in the past three years, $300bn of transactions between hyperscalers and "weaker AI firms", supplemented by $650bn in debt, in exchange for $1.4tn in future financial commitments. Hyperscalers are the firms that build the underlying infrastructure and many vast data centers, including Amazon Web Services, Google, Meta and Oracle.

The report also makes a point that AI optimists may not like. It sees "growing evidence" that the successful rollout of AI "may not require investment on the massive scale being undertaken by hyperscaler firms", and that "potential economic gains may not be as large as expected". Markets reacted the same day. Shares in chip makers fell on Tuesday after the boss of Broadcom compared many AI investors to "casino" gamblers, and reports that Chinese memory chip maker CXMT was making good progress on a new chip architecture also hit South Korean tech firms. In London, the chief executive of the UK Financial Conduct Authority, Nikhil Rathi, told MPs that every small business in the financial sector should consider insurance against AI-related cyber threats. He added that not every firm can pay for access to "frontier" models such as Anthropic's Mythos, which was released on a restricted basis after it was said to be quickly finding gaps in government and corporate cybersecurity systems.

Three cautions for readers. First, this is a risk assessment about what could happen, not a forecast that it will. Listing an AI correction next to two other risks does not mean AI technology will fail. It means that valuations, debt and mutual dependence would enlarge the effect of any disappointment. Second, the figures come from the IMF's analysis, and The Guardian does not give the method, so read $300bn, $650bn and $1.4tn as IMF estimates. Third, the plain steps for ordinary investors are modest: check how much of your fund is in AI-linked firms, avoid using borrowed money to chase one theme, and think about how long you could sit through a fall. This is not investment advice, only a plain reading of the warning.