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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/p>\n
The artificial intelligence boom is entering a new and riskier phase. Global capital expenditure on chips, data centres and cloud infrastructure has, so far, been driven by hyperscalers, funded largely through their vast internal cash balances. But the projected scale of computing power needed for generative AI is now prompting a shift towards more leveraged, opaque and circular financing structures, which raises the economic stakes riding on the technology\u2019s success.<\/p>\n
Between now and 2029, global spending<\/a> on data centres is forecast to hit almost $3tn, according to Morgan Stanley. Big Tech groups will remain major spenders, but cash flows from their advertising and cloud computing businesses can only stretch so far. Many are increasingly looking to public and private credit sources to support further expansion. In August, Meta raised $29bn \u2014 including $26bn of debt \u2014 from private capital investors to fund centres in Ohio and Louisiana. <\/p>\n Although large tech groups still enjoy strong credit ratings, debt is being channelled into projects for non-investment-grade borrowers, such as CoreWeave, ChatGPT developer OpenAI and smaller AI start-ups. Finance is also being secured from other companies within the tech supply chain, creating a dense and interdependent web of exposures. This year OpenAI has announced over $1tn worth of deals for computing power with Nvidia, Oracle, CoreWeave, AMD, and, on Monday, Broadcom. Some agreements have involved complex circular financing arrangements.<\/p>\n The shift in financing broadens the potential economic and financial fallout should generative AI fail to live up to its promise. Until now, most concern has centred on the stock market. Last week, the IMF and Bank of England both warned that tech valuations were approaching dotcom-era extremes<\/a>, heightening the danger of a sharp correction in global equities. A sudden reversal would hit investment funds, pensions and retail portfolios. But the growing reliance on debt, particularly from lower-quality issuers, now also leaves banks and the highly leveraged non-bank sector exposed to any defaults. Incestuous bilateral funding deals only amplify the risk of domino effects.<\/p>\n