Europe girds for war as US punishes ISIS in Syria; investors eye AI-debt bubble

(Originally published Dec. 22 in “What in the World“) Ah, Holiday traditions.

U.S. forces struck Islamic militants late last week, this time remnants of Islamic State in Syria. The attack, which involved both fighter jets and helicopters, struck more than 70 suspected ISIS targets across central Syria with more than 100 munitions to avenge the ambush killing of two U.S. soldiers and their civilian interpreter in Palmyra the previous weekend.

Neither ISIS nor any other group has claimed responsibility the killing of the U.S. soldiers, who were part of ongoing anti-terrorism operations in Syria more than a year since the fall early last December of Syrian dictator Bashar al-Assad. The U.S. still has roughly 1,000 troops in Syria, a sharp reduction since Assad’s fall. Under the administration of former President Joe Biden, the U.S. had roughly 2,500 U.S. personnel in Syria, ostensibly to mop up remnants of Islamic State—though with 70 targets still left to strike one might question their effectiveness.

After Israel’s invasion of Gaza in October, 2023, the U.S. troops became irresistible targets of Iran-backed militias operating in Syria, prompting frequent U.S. reprisals. U.S. attacks against ISIS have mounted in recent months after Syria’s new president, former Islamic militant and ISIS rival Ahmed al-Sharaa, agreed to a multinational campaign against Islamic State.

One longtime center for U.S. anti-terror operations is Mission Support Site Conoco, just north of the Conoco gas plant outside Khasham. Khasham was the site of a 2018 battle between U.S. and Kurdish militias against Russian-backed Syrian government forces using Russian tanks and possibly accompanied by the Russia’s mercenary Wagner Group.

The EU, meanwhile, agreed to lend Ukraine $105 billion, which will help finance its continuing efforts to repel Russia’s invasion and forestall efforts by the Trump administration to get it to agree to turn over the majority Russian-speaking Donbas region and the land bridge to the strategic Crimean peninsula. The loan will help Ukraine meet the $120 billion it needs for its military. While Trump has largely pulled the plug on Ukraine, the U.S. Congress last week passed a record, $901 billion annual defense budget that includes $800 million for Ukraine over the next two years.

European members of the North Atlantic Treaty Organization are already helping Ukraine fill the gap by paying for some of its weapons. And NATO members are already gearing up to more than double their defense spending, to 5% of GDP. NATO’s two newest members, Finland and Sweden, just signed a joint purchase order to buy $171 million in programmable ammo.

The hedges need trimming, again. We’ve already seen a worrisome buildup in debt to buy hedges against uncertainty in interest rates. Now investors are piling into derivatives that protect the massive sums of money they’ve been lending to Big Tech to fund its AI pipe dreams.

Trading in credit-default swaps—a type of insurance contract that pays out if a borrower defaults—on U.S. tech company bonds has soared 90% since early September, according to data reported in the Financial Times. Amazon, Google Meta, and Oracle borrowed $88 billion this fall for their AI projects, according to the FT.

Just like other derivatives, however, there’s no requirement that anyone buying a credit-default swap, or CDS, actually own the underlying debt whose default it’s meant to insure against. Buying such “naked” exposure to debt gives investors a relatively cheap way to bet on default. But just like other derivatives, if the volume of bets grows too large relative to the underlying asset—in this case Big Tech company bonds—it can start to influence the underlying asset’s value instead of other way around. A huge jump in CDS demand can, therefore, undermine the price of a corporate bond, pushing up its effective yield, and thus make it harder for the company to borrow more or refinance its existing debt. That alone can help increase the likelihood of a company defaulting—becoming a self-fulfilling prophecy. During the global financial crisis, this phenomenon was likened to buying insurance on your neighbor’s house burning down.