The Bank for International Settlements (BIS) has drawn attention to a complex convergence of fiscal and financial risks threatening the global economy. In its latest Annual Economic Report, the BIS identified rising public debt, inflationary pressures, and an unprecedented surge in artificial intelligence (AI) investments as key factors that could intensify market shocks if investor confidence falters or borrowing costs rise sharply.
During a recent address, the BIS’s general manager noted that despite resilient global growth sustained by lower-than-expected tariffs, technological optimism, and firms’ adaptability, recent geopolitical tensions in the Middle East disrupted oil markets significantly. Although reopening of the Strait of Hormuz and a ceasefire alleviated some pressures, the BIS emphasized that oil markets require more time to stabilize completely, adding yet another layer of uncertainty to the economic outlook.
The report underscored that major technology companies are driving an AI investment spree exceeding one trillion dollars over two years, transforming this boom into a potential source of financial vulnerability. Corporate credit markets may face repricing risks if AI-driven earnings fall short of expectations, especially since stock valuations have advanced ahead of bond and debt market signals. To fund continued AI development, companies might depend more heavily on debt and private credit, intensifying leverage in an already fragile system.
Public sector debt levels have also climbed, constraining governments’ ability to respond to future economic shocks or inflationary bursts. Meanwhile, the increased participation of hedge funds using repo borrowing under lenient conditions and the growing influence of non-bank financial actors in sovereign bond markets elevate the risk of severe market disruptions—particularly if bond yields rise suddenly and credit conditions tighten.
To mitigate these intertwined risks, the BIS recommends a policy framework focused on maintaining price stability, restoring fiscal buffers, harmonizing regulation across financial sectors, and ensuring liquidity supports remain temporary and flexible. Such measures aim to safeguard against the malfunction of credit and bond markets that could otherwise amplify economic volatility during periods of stress.