Cost to insure AI debt hits record as KOSPI loses $620B

Five-year credit default swaps on a basket of the five largest U.S. cloud and AI firms reached 162 basis points, a record level that implies roughly a 12% probability of default over five years. The move followed a two-day sell-off in Asian chip stocks that removed about $620 billion from South Korea’s KOSPI and triggered market-wide circuit breakers.

The CDS contracts reference Amazon, Meta, Microsoft, Google and Oracle and widened from about 115bps to 162bps in recent months. Credit default swaps let investors pay a periodic fee for protection that pays out if the borrower defaults; wider spreads indicate higher perceived credit risk.

The equity shock began after SK Hynix reported second-quarter operating profit of 60.54 trillion won, short of the 64 trillion won analysts had expected. Hynix shares fell sharply and extended losses over two trading days. Together with Samsung Electronics, Hynix accounts for nearly half of the KOSPI’s market capitalization. Heavy selling led to consecutive trading halts under circuit-breaker rules and prompted the government to convene an emergency meeting of financial authorities.

Retail participation amplified the market moves after regulators approved leveraged single-stock exchange-traded funds in May. Assets under management for those leveraged products exceeded $50 billion in July. Many younger Korean investors shifted capital from cryptocurrencies into AI and semiconductor stocks and used the leveraged ETFs to increase exposure. Following the recent losses, top policymakers apologized for the approvals and sought a renewed ban on retail trading of these products.

Credit-market data show increased borrowing by major tech firms. Analysts tracking hyperscaler debt report the group has more than doubled its collective dollar borrowing since last September to over $360 billion and that free cash flow has turned negative. Combined capital expenditure guidance for Alphabet, Microsoft, Amazon and Meta for 2026 is projected near $725 billion to $730 billion.

Alphabet recorded a $5.9 billion cash burn in the second quarter, its first on record. Oracle’s large contract backlog includes substantial revenue tied to OpenAI. OpenAI has delayed plans for an initial public offering and has struggled to generate cash flow.

The current CDS level implies about a 12% five-year default probability for the five-company basket. The CDS widening and the KOSPI losses occurred at the same time and affected both equity and credit markets.