A Debt-Fueled AI Spending Surge Could Be on the Brink of Collapse
The Bank of England has issued a stark warning: the massive, debt-driven boom in artificial intelligence (AI) infrastructure spending—expected to reach trillions of dollars—may be on shaky ground due to stock market valuations that are stretched far beyond sustainable levels.
On Tuesday, the UK central bank highlighted that any sharp correction in AI stock prices could ripple across broader debt markets. They specifically pointed to early warning signals in credit default swaps, a type of financial instrument used to insure against company defaults, suggesting that firms borrowing heavily to fund AI projects may be increasingly vulnerable.
Currently, much of AI investment comes from 'hyperscalers,' the tech giants sitting on vast reserves of cash. However, the Bank of England predicts that nearly half of the anticipated $5 trillion in AI spending over the next five years will rely on external financing, primarily debt. This means that companies are betting big on borrowing to fuel their AI ambitions.
In its latest Financial Stability Report, the BOE explained that a sharp decline in stock valuations could have a double impact: it could reduce UK household wealth, leading to lower consumer spending, and simultaneously inflict losses on loans provided to companies heavily investing in AI infrastructure. Such a scenario would increase borrowing costs more broadly, affecting a wider swath of businesses.
This is not the first time experts have flagged a potential AI bubble. Comparisons are being drawn to the dotcom era of the early 2000s, when excessive market optimism led to a dramatic collapse. Today, as AI valuations reach seemingly irrational levels, firms are pouring money into data centers and other critical infrastructure necessary for advanced AI technologies.
The BOE also revealed that AI has been a major driver of recent market activity, accounting for approximately two-thirds of the gains in the S&P 500 index this year. Moreover, AI-related investments were behind half of US economic growth in the first half of 2025. Clearly, AI is not just a tech trend—it is reshaping financial and economic landscapes.
"The financing of AI development is approaching a critical juncture," the BOE warned. "If significant credit losses occur—whether directly through AI lending or indirectly—there could be far-reaching effects on broader credit conditions, including in the UK."
The central bank noted that corporate debt issuance by AI companies has been on the rise, with some concerning signs emerging. For instance, the five-year credit default swap spreads of Oracle, a company investing heavily in AI but with lower free cash flow margins compared to larger tech giants, widened from under 40 basis points to around 120 basis points since the end of July. This contrasts sharply with the relatively stable credit default swap spreads seen among US investment-grade companies in general. Since credit default swaps are a measure of perceived risk, widening spreads indicate rising investor concern over a company's ability to repay debt.
And this is the part most people miss: while AI is driving incredible growth and innovation, the financial foundation supporting it is increasingly built on borrowed money. Could this spark a wave of instability if the bubble bursts? Is society underestimating the risks of a debt-fueled AI boom? These are questions investors, policymakers, and the public cannot afford to ignore.
