Arch Capital CIO flags circular AI data-center financing

Arch Capital Group's chief investment officer said the financing behind artificial intelligence data centers has become circular, with hyperscalers standing on every side of the transactions that fund them. Christine Todd said at the Women in Reinsurance Conference in Hamilton, Bermuda, that the interconnections are an underappreciated risk to market resilience, Royal Gazette Bermuda Re reported.

Todd described hyperscalers whose earnings depend heavily on returns from investments in competitors, and who finance construction through complex vehicles held mostly off balance sheet. "They're doing so by being each other's brokers, clients, suppliers, customers and guarantors," she said. She spoke to nearly 300 delegates at the conference's keynote address.

For an allocator, the warning is a counterparty question: exposure to a hyperscaler-linked vehicle can rest on several obligors that also supply, buy from and guarantee one another. Issuer limits counted name by name would not capture that overlap. Todd's summary: when one shoe drops, no one knows what happens to the intertwined risk.

Bain & Co. estimates the industry must generate $6 trillion in annual revenue by 2031, and that existing consumer and enterprise AI can cover up to $1.8 trillion of it, as Private Wealth Daily previously reported.

She said inflation in developed and emerging markets is rising and settling at higher levels, and that higher rates are now a lasting condition. "Expect going forward that interest rates are going to be higher," she said. "That's just a permanent state from now on for all of us. And that's in every country."

Todd said bond markets are already signaling heightened credit risk and fiscal vulnerability. In the United States, interest expense is projected to become the second-largest line item in the federal budget, behind Medicare and ahead of Medicaid. Since the 1800s, she said, 51 of 52 countries that reached a debt-to-GDP ratio of 130% defaulted, restructured or inflated their way out.