Is the global economy on the brink of the "Sword of Damocles"? BIS rings three alarm bells: AI bubble, inflation ghost, and high debt pressure.

The Bank for International Settlements (BIS) issued a warning in its annual report that the bursting of the artificial intelligence (AI) bubble, recurring inflation, and fiscal pressures have become the three major "risk points" threatening global economic prosperity. The Basel-based institution pointed out that these pressure points "urgently require high attention," and the vulnerabilities accumulated at the bottom of the financial system could amplify any sudden shocks. The BIS stated in the report, "The global economy is caught between progress and danger, and resilience is facing increasingly severe tests." The release of this report coincides with the annual symposium of the European Central Bank in Sintra, where global policymakers will closely assess such stability risks. Risks of the retreat of AI investment boom The BIS emphasized in particular that if returns in the AI field fall short of expectations, it could trigger a sudden contraction of financing, rapidly reversing the current capital spending boom into a prolonged investment slump, and then produce widespread spillover effects through the tightening of financial conditions. The report stated, "The impact of a significant stock market correction on the macroeconomy today may far exceed historical experience." Additionally, other asset classes also face similar risks, especially the credit market. The BIS warned that if this risk reassessmentwhether triggered by rising interest rates or an AI collapseits destructive power may be comparable to the global financial crisis of 2008. Specifically in the AI sector, the report highlighted complex arrangements in financing structures, such as "recycled financing" transactions that bundle equity, debt, and supplier-customer contracts. For example, chip manufacturers and large-scale enterprises investing in AI labs or "new cloud" service providers, the latter committing to multi-year purchases of chips or computing power; data center construction is often outsourced to third parties and then leased back to large-scale enterprises with long-term leases, often embedded with exit clauses. The BIS pointed out, "Such transaction terms are generally under-disclosed, the same asset may be pledged multiple times, and the risk exposure is difficult to assess." Inflation shadows still lingering, energy shock repercussions remain Although recent easing of tensions in the Middle East has brought oil prices back to late February levels, the BIS's concerns about rekindling inflation contradict the market's short-term optimism. The report believes that energy supply disruptions have not been completely resolved, infrastructure reconstruction takes time, and the lingering effects of existing shocks may persist. Earlier US data showed that inflation rates had reached a three-year high, and upcoming inflation data from the eurozone is expected to remain well above the 2% target. BIS General Manager Carstens said, "Memories of the 2022 cost of living shock are still fresh, indicating an increased likelihood of 'second-round effects' occurring." Sovereign debt risks intertwined with market fragility The BIS reiterated its traditional concerns about high levels of sovereign debt and pointed out that the current combination of multiple risks has made the situation more complex. In line with the views of the OECD, the BIS noted that hedge funds and other investors have become important buyers of government bonds, and their leveraged strategies depend on short-term favorable financing, which could lead to rapid closure in a deteriorating environment. The report warned, "These funds adopting high leverage strategies are highly likely to trigger fire sales and deleveraging negative feedback loops. Financial pressures can now spread rapidly and widely through financing markets, cross-border channels, and between banks and non-bank institutions." This year's turbulence in the UK government bond market has revived memories of the 2022 crisis, and volatility in the Japanese bond market has also affected the US bond market. Carstens said, "Market reactions can be triggered at any time by political or economic events, and vulnerability must be reduced before such reactions appear." As a global central bank advisory institution, the BIS emphasizes that strict monetary policy discipline is essential to ensure that inflation expectations do not deviate due to recent surges in energy prices and other supply shocks. Even if growth is temporarily harmed, decision-makers should not shy away from raising interest rates. The report concluded, "Policies should reinforce each othersound fiscal policy consolidates monetary credibility and financial stability; strong regulation enhances market resilience, preserves fiscal space, and reduces the need for frequent interventions by central banks; credible monetary policy firmly anchors inflation expectations."