Heavy government borrowing and soaring AI investment are putting pressure on capital, while companies remain resilient. A sharp drop in profits, however, could trigger a global financial crisis....
For the past few years, artificial intelligence and geopolitics have dominated discussions about the global economy. Yet behind both lies a financial question that deserves far more attention: how will all this investment be financed?
Governments are borrowing at extraordinary levels, technology companies are committing trillions of dollars to AI infrastructure, and businesses across the economy are facing a higher cost of capital. The combination is reminiscent of the late 1990s, when enthusiasm for internet-fueled investment and soaring valuations was at a high before the dot-com bubble burst.
There is, however, an important difference. Many of today’s leading companies are genuinely profitable. They have reduced their debt, strengthened their balance sheets, and accumulated substantial cash reserves. However, as the financial environment becomes more uncertain, the question is whether that resilience can withstand what comes next.
Governments are borrowing more than ever, and the figures are striking. The OECD projects gross sovereign borrowing of around $18 trillion in 2026, while outstanding sovereign bond debt across its member economies is expected to reach 85% of GDP. The International Monetary Fund has warned that global public debt could reach 100% of GDP by the end of the decade.
Governments have plenty of reasons to spend. The pandemic left substantial financial commitments, while energy security and geopolitical tensions have created new demands on public finances. But there is also a less comfortable explanation: spending is politically attractive, while fiscal discipline rarely wins elections. The bill, meanwhile, will have to be paid by future generations.
The difficulty is that borrowing is becoming more expensive. Investors are demanding higher returns to lend over longer periods, reflecting uncertainty about inflation, interest rates, and the credibility of government policies. This additional compensation, known as the term premium, is raising the cost of long-term debt.
The consequences extend beyond public finances. Government borrowing costs provide an important benchmark for corporate financing, meaning that when sovereign yields rise, companies generally face higher costs too. For decades, US government debt was treated as the closest thing to a risk-free asset. Yet even the creditworthiness of the United States has come under scrutiny, challenging the traditional distinction between governments as safe borrowers and companies as risky ones.
Governments are not the only borrowers making extraordinary demands on global capital markets.
Companies outside the AI boom may face a higher cost of both debt and equity, even when their underlying businesses are performing well.
Major technology companies are spending vast sums on data centers, advanced chips, and the energy infrastructure needed to support them. Their combined capital expenditure could run into trillions of dollars by 2030, and even highly profitable businesses cannot necessarily finance investments on this scale entirely from their own resources.
Consider the choice facing an investor. Would they rather finance one of the world’s most profitable technology companies, with enormous resources and ambitious AI investment plans, or a traditional carmaker such as Volkswagen? There may be perfectly good reasons to invest in Volkswagen, but attracting that capital is becoming more expensive when technology giants are competing for the same money.
In this sense, AI investment is squeezing the oxygen out of capital markets. Governments are borrowing heavily, technology companies are absorbing enormous amounts of financing, and businesses in other sectors must compete for increasingly expensive capital.
The pressure extends to equity markets, where investors can also choose between technology and other industries. As a result, companies outside the AI boom may face a higher cost of both debt and equity, even when their underlying businesses are performing well. Projects that looked attractive when capital was cheap may no longer generate sufficient returns.
The problem is that profits can disappear much faster than debt obligations.
Given these pressures, widespread corporate financial distress might seem inevitable.Â
Yet while sovereign borrowers, traditionally considered among the safest, are facing growing questions about their creditworthiness, strong earnings have allowed companies to absorb higher interest costs, while many have also reduced their leverage, lowered their net debt and strengthened their balance sheets. This reduces their dependence on debt, and preserves financial flexibility. That profitability helps explain why equity markets have remained resilient despite geopolitical uncertainty and rising borrowing costs. As long as companies generate sufficient earnings, they can service debt and withstand a more demanding financial environment.
The problem is that profits can disappear much faster than debt obligations.
Red Lobster illustrates how quickly financial difficulties can escalate. Its much-publicized unlimited shrimp promotion added to losses at a time when the American restaurant chain was already struggling with declining sales and expensive lease obligations. The problem was not simply a costly commercial mistake, but the company’s limited financial flexibility when performance deteriorated.
Peloton faced a different version of the same difficulty. During the pandemic, surging demand for home fitness equipment prompted rapid expansion, including plans for a new manufacturing facility in Ohio. When demand weakened, the company was forced to reverse course, abandoning the factory project and restructuring its operations.
In Indonesia, textile manufacturer Sritex faced bankruptcy proceedings after declining demand and mounting debt left it unable to meet its financial obligations. Although these companies operated in different industries, their experiences illustrate how financial structures that appear manageable during periods of strong earnings can become dangerous when conditions change.
The danger lies in the interaction between heavy sovereign borrowing, intense competition for capital, and weakening corporate earnings.
A sharp deterioration in corporate earnings is what makes today’s financial environment particularly concerning. Governments are already borrowing heavily, while AI investment is intensifying competition for capital. Both are contributing to higher financing costs, leaving companies more exposed if profitability weakens.
Energy is one potential trigger. A major geopolitical disruption could push prices higher, increasing production and transportation costs while reducing consumers’ spending power. Businesses would face rising operating costs and weaker demand, squeezing their margins.
Governments might respond with additional spending to protect households or secure alternative energy supplies, adding to sovereign borrowing when investors are already concerned about public finances. Meanwhile, companies experiencing declining profits would still need to service existing debt and refinance obligations as they mature.
The danger is that these pressures do not occur in isolation. Higher government borrowing costs would hit companies just as weaker earnings reduced their ability to absorb them.
Unlike the dot-com era, today’s leading technology companies have substantial revenues, strong earnings, and established businesses. Nevertheless, the extraordinary sums being committed to AI will eventually need to generate adequate returns. If those disappoint, or geopolitical disruption produces a sustained shock to corporate profitability, the consequences could extend well beyond technology.
The danger lies in the interaction between heavy sovereign borrowing, intense competition for capital, and weakening corporate earnings. That is how the conditions for a perfect financial storm could emerge.
High yields alone do not break companies. Falling earnings combined with high debt do.
None of this makes another financial crisis inevitable. Corporate balance sheets are generally stronger than they were several years ago, and businesses have demonstrated considerable resilience in adapting to a more expensive financial environment.
But several indicators deserve attention: energy prices, government fiscal credibility, corporate earnings, stress in private credit markets, returns on AI investment, and liquidity in financial markets. Of these, profitability is particularly important. A sustained decline would remove one of the strongest defenses companies currently have against higher borrowing costs.
For business leaders, this means reassessing investment decisions, debt maturities, and capital structures against a world in which capital is no longer cheap and strong earnings cannot be taken for granted. A financing strategy that worked during a period of expanding profits may offer far less protection when margins come under pressure.
Another financial crisis is far from inevitable. But if profits fall while borrowing costs remain high, companies could find themselves facing financial difficulties much faster than they expect.Â
High yields alone do not break companies. Falling earnings combined with high debt do. The time to question a company’s financial resilience is when profits are strong, not when they start to disappear.
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This article is inspired by a keynote session at IMD’s signature Orchestrating Winning Performance program, Singapore (2026), which brings together executives from diverse sectors and geographies for a week of intense learning and sharing with IMD faculty and business experts.
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