Circular Financing Deals Pose Systemic Risks According to IMF

The International Monetary Fund has issued a stark warning regarding the potential systemic risks posed by opaque circular financing deals among major artificial intelligence firms. The organisation highlighted that growing interdependencies within the AI and technology sectors are creating conditions where an isolated shock could reverberate through the entire financial system.

Circular financing arrangements involve an investor providing capital to a company, which is then used to purchase products or services from the same investor. The IMF’s global financial stability report notes that the increasing prevalence of such financing structures has heightened concerns about systemic spillovers, especially if an adverse scenario impacts even a single entity.

Since last year, these deals have gained traction, with startups like OpenAI and Anthropic receiving substantial investments—amounting to tens of billions—from industry giants such as Microsoft, Nvidia, and Amazon. These deals frequently come with long-term agreements to spend heavily on cloud infrastructure and AI chips, raising parallels to the dynamics observed during the dotcom bubble of the late 1990s.

The IMF further expressed concerns about the difficulty in tracking the relevant market fundamentals due to the opacity created by these arrangements. This situation could result in ripple effects across markets, amplifying the consequences of any financial shock.

Analysts also warned that interconnectedness may lead to inflated revenue reporting among AI-related firms. Such occurrences can detach financial performance from actual fundamentals, increasing the risks of overvalued equity and impacting market pricing broadly.

Efforts by IMF staff to identify vulnerable firms within the AI supply chain underscore the challenges presented by substantial expenditure on AI infrastructure, projected to reach $1.4 trillion this year. While major players—often referred to as ‘hyperscalers’—like Google, Microsoft, and Nvidia have robust balance sheets, other segments, such as power producers for data centres, may not exhibit the same resilience.

The report suggested that hyperscalers could face mounting pressures in the coming years due to the anticipated $3.4 trillion in AI-related capital expenditure through 2029. Many have increasingly relied on debt to finance these investments. The IMF noted that financial markets have generally been receptive to absorbing this debt, indicating that associated risks remain manageable for the time being.