European defence stocks face uncertainty

0:28AI pilots are everywhere. Good morning from the Financial Times. Today is Thursday, June 25th, and this is your FT News Briefing. Anthropik is beefing with Alibaba, and European defense markets are in flux ahead of a major IPO. Plus, how long can America's debt problem go on? Well, the public debt in America now exceeds 100 % of GDP. So we're talking very large numbers indeed, which are quite hard to wrap one's head around. I'm Mark Filippino, and here's the news you need to start your day.

1:11Anthropik is accusing the Chinese e-commerce giant Alibaba of illicitly using its Claude AI assistant to train cheaper and smaller models. In a letter to Congress, the U.S.-based AI company said Alibaba conducted the, quote, largest campaign to illicitly extract Claude's capabilities. Anthropic alleges that Alibaba did so by creating 25 ,000 fake accounts, which were used for tens of millions of interactions. Anthropic does not offer Claude in China, and it's asking Congress to crack down further on Chinese labs accessing advanced AI chips, which are restricted by U.S. export controls. Meanwhile, Alibaba this week asked to be removed from a Pentagon blacklist of Chinese companies with alleged ties to China's military.

1:55Last fall, the FT learned that the White House concluded that it had provided tech support for, quote, operations against unspecified U.S. targets. Alibaba has denied any connection to the People's Liberation Army. At the time of this recording, it had not responded to the accusations from Anthropic.

2:17Tankmaker KNDS is planning to list its shares on the Paris and Frankfurt exchanges, and the Franco-German venture is set to have one of the largest European flotations in recent memory. But the initial public offering announcement comes at an uncertain time for Europe's defense sector. Aaron Kirchfeld is the FT's chief European business correspondent. He's been writing about this. Hi, Aaron. Hi. So let's start with KNDS. Tell me about the company and the IPO that they're planning. So KNDS is one of the biggest defense companies in Europe. It's a crucial supplier to the war in Ukraine because they make the famous Leopard tank.

2:55And so this is kind of a pivotal moment for the company because until now it's been private, held between the French government and a German family. But that now has come to a head because the German family wants to sell out after many years as its owner. And so they've agreed to do a listing after selling a big chunk to Germany to make sure that Germany and France remain the biggest and equal shareholders in the tank maker. Now, why is this IPO something that people are talking about in the same breath as Rheinmetall, a different German defense manufacturer? Yeah, that's because yesterday when KNDS finally got to the point where it was ready to announce the launch of its IPO, and this is after almost a year of planning and wrangling between politicians, the German government, unrelated, decided to cancel a huge warship order with Rheinmetall, one of the main KNDS peers.

3:47So the positive investor sentiment around KNDS and the possible IPO has been somewhat overshadowed by this negative news of a huge order being missed by one of their competitors. And so there's been so much euphoria around European defense companies. But in the last several months, that has kind of come down significantly. So the news yesterday has really brought to the fore the challenges faced by some European defense makers. Let's back up a little bit. Can you give me a big picture here? of why European defense is bringing in so much interest right now? Of course, it's because, you know, we're in a historical moment where Europe is finally investing hundreds of billions in defense.

4:30And that's largely due to President Trump pressuring NATO members to up their investments and also the European feeling and the reality take that they might not be able to rely on the US like they did in the past. So investors obviously want to get on that train because the orders are going up and up and up. So then how did investors react to yesterday's news with Ryan Mattel? So yesterday we saw a dramatic plunge in Ryan Mattel shares, a 19%, which is one of the biggest drops in almost a year. And that was because the CEO of Ryan Mattel had built such a high expectation they were going to get this mega ship order that when it didn't materialize, investors started asking themselves whether they can trust the predictions and whether there is enough visibility on which orders are going to which defense companies.

5:17Given all this, Aaron, what are we expecting from the KNDS IPO? And I guess, you know, what are you watching ahead of it? So what we're hearing is that the valuation expectations, like the rest of the defense market, have come down significantly. So when we were talking about this IPO almost a year ago, we were talking about ranges of 20 billion euros or more. Now we're hearing from sources, it's gone down to more like 12 to 15 billion euros. Still a significant amount, but obviously a steep decline. And that kind of traces the share price development of Rimetal. And it just reflects the somewhat negative sentiment among investors that maybe the stock runs had gotten out of control.

5:56That said, this is still a pivotal moment for European capital markets if it goes ahead. And I think it also is important because it's a time when there's a lot of demand for European countries, France and Germany in particular, to work together to bolster their defenses with the war in Ukraine and the rest of the geopolitical developments. Aaron Kirschfeld is the FT's chief European business correspondent. Thanks so much, Aaron. Thank you for having me.

6:26MENA is ramping up its plans to replace human moderators with artificial intelligence. For years, the tech giant has used both humans and bots to review posts and ads, but employees usually handled complaints that came directly from users. That is, until now. AI is now reviewing about 50 % of requests sent in by users, and that's expected to increase. The shift has already led to layoffs on some teams, which could help Meta save billions of dollars per year, according to sources. CEO Mark Zuckerberg has been looking to offset his heavy spending on AI products. But the company says that its AI moderators are solely meant to improve how it regulates content.

7:11The U.S. is up to its eyeballs in debt. The ratio of public debt to gross domestic product is the highest it's been since World War II. And the percentage of that GDP, which we're paying in interest, is also at record levels. The borrowing doesn't seem to show signs of slowing either. John Plenner is the FT's senior editorial columnist. John recently wrote about this in an essay called Trump's Empire of Debt, and he joins me now. Hi, John. Hi, Mark. John, I feel like the current scale of American debt gets a little lost because it's so hard to conceptualize. Let's start with how bad is it and why you're writing about it now.

7:50Well, the public debt in America now exceeds 100 % of GDP. GDP is just over$32 trillion. So we're talking very large numbers indeed, which are quite hard to wrap one's head around. This is unprecedented in peacetime. The reason I felt a need to write about this at the moment was, first of all, Donald Trump's war of choice in Iran, which is going to be very, very costly. I think the other reason I felt a need to write about this issue of imperial overstretch is that I detect nervousness in the markets. It started around the time of Trump's announcement of tariffs, but there have been periodic bouts of nerves in the Treasury market, which I think are rather unusual, and they are indicative of people being scared about the public debt, also about Trump's erratic policymaking.

8:41So, John, how did we get here? I think the striking thing about today's debt situation is that since 9-11, America's wars have been entirely financed by debt. The cost of the war in Iraq and Afghanistan and the other forays into the Middle East has been put by Brown University's Cost of Wars project at about$8 trillion. That admittedly includes$2.2 trillion for future care of veterans, but it doesn't include anything for interest on the debt. One of the things that comes to mind when we talk about national debt here in the U.S. is campaign promises. President Trump, among others, have told us that he will take care of the debt.

9:25How likely is that to happen? Can he actually do that? Well, you have to bear in mind that President Trump has submitted to Congress a national defense budget request for 2027 of an extraordinary 1.5 trillion, which is double the figure for 2020. And I think although there have been promises from President Trump and from Scott Besant, the US Treasury Secretary, to get these numbers down, the fact is that there is a deficit bias built into American politics. Politics are very, very polarized. And it's very hard for anybody to make and fulfill a promise to bring down the level of debt. My money is on a continuing increase in the debt for the rest of the Trump period.

10:10But then the deficit bias will continue under any new president in two years time. What would it look like if the U.S. were to buckle under its overreach? How would we know it's happening? Well, it's striking that central bank reserve managers around the world have been reducing their investment in the U.S. Treasury market and turning to investments like gold, commodities, and some of the smaller countries' debt markets. The fact is that there can be a tipping point, and you will see it. The signs of the U.S. losing its economic primacy will be a collapsing dollar and a huge increase in yields in the U.S.

10:51Treasury market and thus a big decline in prices, an implosion in effect in the U.S. Treasury market. What that means is, first of all, there will be more inflation in America, borrowing costs for ordinary households as well as the government will rise, and we will probably be looking at a stagflationary situation, one where you have both high inflation and stagnation in the economy, very low growth indeed, if any. John Plunder is a senior editorial columnist for the FT. Thanks so much, John. Not at all. My pleasure. Just a friendly reminder that we want to hear from you. We're doing a survey this week and next on a potential Saturday version of the briefing, and your thoughts really matter to us.

11:33It'll take like five minutes, and you'll be entered to win a pair of Bose headphones. You can find that link in the show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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