By Marc Jones
LONDON (Reuters) – The Bank for International Settlements warned on Sunday that rising government debt levels could rattle global financial markets during a series of major elections this year.
The BIS, sometimes called the central bankers’ central bank, said the global economy was now on track for the “soft landing” that many economists had doubted as interest rates shot up, but said policymakers, especially politicians, needed to be cautious.
Global sovereign debt is already at record levels and elections, ranging from the US presidential election in November, through recent elections in Mexico and South Africa, to elections in France and Britain in the coming week, all pose risks.
BIS General Manager Agustin Carstens said interest rates are not about to return to ultra-low levels and that cost pressures from an aging population, climate change and the rebuilding of defense capabilities, economic stimulus plans and a general increase in protectionism could disrupt sensitive markets.
“They can surprise you without much notice,” Carstens said, pointing to the turbulence in British markets following then-Prime Minister Liz Truss’s budget plans, which left some pension funds at risk of collapse. “You really want to avoid that.”
In addition to ongoing concerns about US government debt, the risk premium on French government debt rose this month to its highest level since the euro crisis in 2022, after French President Emmanuel Macron called early parliamentary elections on Sunday that could produce a far-right government.
According to Carstens, the BIS did not criticise “one or two” governments, but the message was clear.
“They (governments) need to curtail the rise in government debt and accept that interest rates may not return to the ultra-low levels seen before the pandemic,” he said. “We need a solid foundation to build on.”
INFLATION BATTLE
On the bright side, central banks are successfully reining in inflation, which reached multi-decade highs following the COVID-19 pandemic and Russia’s invasion of Ukraine in 2022, which roiled commodity markets.
“Compared to last year, I have to say we are in a much better position,” the former governor of Mexico’s central bank told reporters as the BIS published its annual report.
Carstens said central banks deserved praise for navigating a difficult path that could have resulted in a wave of recessions, but he added that they had to persevere. He compared the fight against inflation to a course of antibiotics to fight a disease.
He described an “extreme” scenario in which inflation rises again and central banks have to raise interest rates further. But that is not what the BIS expects.
However, the BIS report states that central banks should not hastily reduce their interest rates.
“Too early easing could rekindle inflationary pressures and force a costly policy shift,” the report said.
(Reporting by Marc Jones; Editing by Emelia Sithole-Matarise)
