Big Tech Floods Euro Bond Market, Raising Credit Risk
US tech giants such as Google, Amazon, and Microsoft are flooding the euro zone bond market to fund their massive AI investments. According to a European Central Bank blog post, these firms could spend up to $1 trillion on AI-related investments by 2028, forcing them to tap debt markets globally. With around €40 billion ($46 billion) of bonds outstanding in the euro zone, these tech firms account for nearly 10% of gross new issuance.
Amazon and Alphabet have been the largest corporate issuers in the euro zone bond market this year. However, the increasing presence of big tech in the market may push up borrowing costs for all sectors, as they accumulate debt and account for a growing share of bond markets. This could lead to a spillover effect on sovereign and supranational borrowers.
The blog post also warned that the high credit ratings assigned to big tech debt may prove overly optimistic. The authors argued that rating agencies may be based on assumptions about future revenue growth and leverage, which may not stand the test of time, heightening the vulnerability to mispricing of credit risk.