High debt, AI frenzy, and financial fragility: BIS warns of global risk triple threat

High Debt, AI Frenzy, and Financial Fragility: BIS Warns of a Global Risk Trio

The Bank for International Settlements (BIS) — the central bank for central banks — has sounded the alarm in its Annual Economic Report. The report points out that the global economy faces a series of intertwined vulnerabilities: sovereign debt soaring to historic highs, investment fever in artificial intelligence harboring risks of excessive speculation, renewed inflationary pressures, and systemic risks from non-bank financial intermediation. BIS General Manager Pablo Hernandez de Cos stated bluntly: "Policy actions must reinforce each other and avoid pulling the global economy in different directions. Ultimately, success depends on sound fiscal and financial foundations."

The Ghost of Inflation Returns: Supply Shocks Could Unanchor Expectations

Despite recent resilience in economic activity, inflationary pressures are heating up again. The BIS warns that more frequent supply shocks — such as geopolitical conflicts and energy price volatility — could entrench inflation expectations at elevated levels. De Cos emphasized that central banks must "be ready to act" and intervene decisively once they observe inflation expectations becoming unanchored. While the recent ceasefire between the US and Iran in the Middle East and the reopening of the Strait of Hormuz have alleviated extreme scenarios, full normalization of oil markets still requires time.

Hidden Concerns in the AI Boom: A Tug-of-War Between Bubbles and Productivity

Artificial intelligence is emerging as a new engine for global growth, boosting confidence and raising expectations of productivity gains. However, the BIS highlights a downside: the sustainability of AI infrastructure investment is worrisome. Supply chain bottlenecks and intense competition among firms could repeat the boom-bust cycles of history — overinvestment followed by excess capacity. Moreover, the impact of AI on the job market remains unclear, and central banks face fundamental questions about how to assess the economy's potential operating mode. De Cos believes it would be "unwise" to prescribe central bank responses at this stage, but regulators must keep monitoring.

Financial Fragility: Asset Bubbles and Leveraged Financing

The report notes that global asset valuations are elevated, investor complacency is widespread, and core bond markets have become more fragile. Financing for the AI boom increasingly relies on debt and complex structured instruments in supply chains. If market sentiment reverses, it could trigger a chain reaction. Frank Smets, Acting Head of the BIS Monetary and Economic Department, warned that sovereign bond markets are increasingly dominated by large, highly leveraged hedge funds, creating a "new sovereign-financial stability nexus" that could lead to more frequent and severe declines in sovereign bond values, thereby rapidly tightening financial conditions.

Debt Cliff: The Role of Non-Bank Intermediaries Cannot Be Ignored

Public debt as a share of GDP has reached a historic record, while financing channels increasingly rely on non-bank financial intermediation. De Cos emphasized: "Debt is high today, and it is financed through non-bank financial intermediaries." This amplifies fiscal sustainability risks. The BIS urges policymakers to prioritize ensuring price stability while advancing fiscal sustainability, and to strengthen regulatory coordination over the non-bank sector. Any delay in action will only make the necessary adjustments more costly.### Long-Term Perspective: Rebuilding Global Economic Resilience

From a longer economic cycle perspective, the BIS report reveals a deep shift in the global growth model. The past expansion model that relied on low debt and low interest rates is no longer sustainable. Deglobalization trends, the energy transition, and the structural changes brought by AI all require a more solid fiscal and financial foundation. The BIS suggests that countries should prioritize structural reforms, boost productivity, and build stronger buffer mechanisms to cope with future shocks.

Overall, the BIS warning is not alarmist but a sober assessment of current vulnerabilities. Global central banks and fiscal authorities are at a crossroads: will they continue to delay adjustments, or decisively rebuild stability? The answer will determine the economic trajectory of the next decade.