Slitherine

What does it mean in the diplomacy modifiers when it says, "You are overextended"? I'm not sure how to fix the problem.

It just means the country is stretched fighting too many wars generally.

Or maybe that you control a lot of territories with low loyalty and that the ai believes you can't hold all that territory.

Im pretty sure it means your Decadence-culture ratio is bad and hence the AI "predicts" that your country may explode in the future and due to this you are slightly unreliable partner in an alliance or cooperation.