Rising government debt levels have been identified as a significant threat to global financial markets by the Bank for International Settlements (BIS). As various major elections are set to take place this year, concerns are mounting over the impact of these events on the stability of the world economy. With global government debt already at record highs, elections in key countries such as the United States, France, and Britain pose potential risks that could lead to market turbulence.
BIS general manager Agustin Carstens emphasized the need for careful policymaking, particularly in the face of factors such as aging populations, climate change, and increased protectionism. The possibility of economic stimulus plans and a rise in protectionism could further complicate the situation, potentially unsettling sensitive markets. Carstens warned that unexpected developments could arise with little warning, citing the example of the market turbulence in Britain following budget plans that put pension funds at risk.
Aside from the persistent worries about U.S. debt levels, the risk premium on French debt has spiked to its highest level since the eurozone crisis in 2012. French President Emmanuel Macron’s decision to call a snap parliamentary election added to the uncertainties, raising the possibility of a far-right government coming to power. Carstens stressed the importance of curbing the rise in public debt and accepting the reality that interest rates may not return to previous ultra-low levels.
On a positive note, central banks have been successful in reining in inflation that spiked following the COVID-19 pandemic and Russia’s invasion of Ukraine in 2022. While acknowledging the progress made in addressing inflation, Carstens highlighted the need for central banks to remain vigilant. Drawing parallels to a course of antibiotics for an illness, he cautioned against premature easing that could reignite inflationary pressures and lead to costly policy reversals. The BIS also warned of the potential consequences of inflation racing up again, prompting central banks to raise rates further.
The warning issued by the Bank for International Settlements serves as a reminder of the challenges facing the global economy. With rising government debt levels and the uncertainty surrounding major elections, policymakers need to exercise caution to avoid triggering financial market disruptions. As central banks continue to navigate the complexities of inflation control, a delicate balance needs to be maintained to ensure stability and sustainable economic growth in the long run.