ECB warns: The debt of technology can increase State interest

ANDthis is the conclusion of economists from the European Central Bank (ECB) in an article published today on the institution's blog.

The article analyses the growing presence of large American technology companies in the euro area corporate securities market and its consequences.

Hyperscale companies, such as Amazon, Microsoft, Google, Meta and Oracle, increasingly resort to the eurozone corporate securities market to obtain part of the funding needed for artificial intelligence.

Contagion for sovereign securities will depend in part on large technology companies concentrating a greater share of investors' interest or if they manage to expand to absorb the additional issue.

The contagion effect for the segment of sovereign and supranational securities would occur through three channels.

Firstly, the offer is crucial, and the volume of new securities from large technology companies could affect the interest of investors.

If hyperscale companies offer large amounts of securities at lower prices and higher yields, investors may reject current income if they foresee future increases.

Second, investors can relocate their portfolios to the debt of US technology companies, raising costs even for issuers of unrelated sectors.

The exposure of euro area investors to the debt of hyperscale companies is small for now, but it grows rapidly due to the strong demand for pension funds and insurers, who want high-quality and long-term assets.

For pension funds and insurers, “the debt of hyperscale companies may seem a viable alternative to some securities considered safe ports,” the ECB’s economists say.

“ Thirdly, the dynamics of securities indices can amplify the effect”, adds the article. As large technology companies gain weight in securities indices, investors can increase the upward pressure on the income of other securities.

ECB economists predict that hyperscale companies will need more than $1 billion in capital investments by 2028, an amount equivalent to 3% of the current US Annual Gross Domestic Product (GDP).

Investments are too large to be financed only with internal cash flows, so these companies use securities.