IMF Warns That $1.4 Trillion in Circular AI Deals Could Amplify a Market Correction

On Tuesday, October 13, the International Monetary Fund put AI on its list of the three main threats to financial stability. In the IMF's assessment, a correction in stocks and debt tied to artificial intelligence could set off market turbulence and sharply tighten lending conditions. The publication's headline cites a figure of $1.4 trillion, which is the size of the so-called circular deals in the industry.

The portion of the report that is available does not disclose how the figure was calculated, so it should be read as an estimate of scale, not as an exact balance of obligations. The direction of the argument is clear, though: the fund sees the AI sector's risk not only in stock valuations but also in its growing debt burden.

Three risks on one list

The warning came as part of the IMF's regular financial stability review. Besides AI, the IMF named two other scenarios that could sharply tighten conditions:

• a correction in AI stocks and AI-related debt;
• a spike in government bond yields;
• cyberattacks.

The company AI keeps is telling. Government bond yields set the price of money across the whole economy, and a cyber incident can halt payments and take down major platforms. AI sits in the same row as a factor that could noticeably shift asset valuations across the entire market, not just in one sector.

How the circular scheme works

The mechanics are familiar from deals of recent years. A supplier of chips, cloud services or infrastructure invests money in a model developer, and the developer sends it back as orders for compute. The supplier's revenue grows, the customer's valuation grows, and both numbers feed market optimism. As long as end-user demand grows faster than obligations, the structure holds.

The weak point is that revenue inside such a loop depends on the customer's ability to raise new capital. If investors revise valuations, orders for hardware and data centers could shrink almost at the same moment share prices fall. Add debt financing for building out capacity, and the correction turns from an equity problem into a credit problem.

That is why the IMF talks not only about stocks but also about debt. Bonds, data-center loans and project financing react to worsening expectations differently from equities: their prices adjust more slowly, but the damage to banks and funds holding that paper is more severe.

What is known and what is not

Three things follow from the published portion:

• the total of circular deals is estimated at $1.4 trillion;
• both stocks and debt are at risk;
• AI sits in the same row as government debt and cybersecurity.

The report does not say which contracts went into the calculation, which companies the fund considers most vulnerable, or what downside scenario it assumes. Those details will be in the full text of the report.

What practitioners should watch

For investors, the main benchmark right now is what share of AI suppliers' revenue comes from customers they also finance. The higher that share, the tighter the link between share prices and other companies' funding rounds.

For AI companies, the practical takeaway is simpler: check how closely compute contracts depend on raising outside capital, and keep a reserve in case financing becomes more expensive. A rise in government bond yields, which the IMF put on the same risk list, will hit the cost of debt faster than any industry news.

For those building products on other companies' models and clouds, the signal is calmer but not zero: if a provider carries an aggressive debt load, it is worth having a fallback. The full text of the report will provide details and figures, and how closely it is read will determine how seriously the market takes this warning.