BIS issues government debt warning ahead of key election By Reuters

Written by Marc Jones

The Bank for International Settlements on Sunday warned that the increase in government debt as there is a big election this year may affect the global financial markets.

BIS, which is called the central bank, BIS said that the world economy is coming to a “smooth” many economists who were skeptical when the interest rates will rise, but they say that policy makers, especially politicians, need to be careful.

World government debt is already at an all-time high and with elections ranging from the US presidential vote in November, with recent votes in Mexico and South Africa, to votes in France and Britain next week, everything is fraught with risks.

BIS General Manager Agustin Carstens said that since interest rates will not return to very low levels, as well as cost pressures from an aging population, climate change and the renewal of defense forces, economic recovery programs and an increase in the level of protection may disrupt sensitive markets.

“They can surprise you by undervaluing it too much,” Carstens told reporters when the BIS published its annual report, pointing to the turmoil in British markets following then-Prime Minister Liz Truss’ budget plans that put some pension funds at risk of collapse. “You really want to avoid that.”

Along with continued concerns about US debt levels, France’s credit risk premium rose this month to its highest level since the euro zone’s 2022 crisis, after French President Emmanuel Macron called a parliamentary election on Sunday that could bring the government the right one.

Carstens said the BIS is not announcing “one or two” governments but the message is clear.

“(Governments) must reduce the increase in public debt and accept that interest rates may not return to the low levels before the pandemic,” he said. “We need a solid foundation to build on”.

THE BEST PLACE

The good news, however, is that central banks successfully intervened in the decades-long run-up to inflation after the COVID-19 pandemic, and then Russia’s invasion of Ukraine in 2022, which sent shockwaves through stock markets.

“Compared to last year, I must say we are in a much better place,” said the former governor of Mexico’s central bank.

While Carstens said the central banks deserved credit for taking the tough path that would have caused the recession, he added that they needed to be patient, likening the fight against inflation to antibiotics to fight illness.

He described an “extreme” scenario where inflation rises again and central banks need to raise rates further. But that is not what BIS expects.

Other factors will be key, however, including prices of goods and services, which, compared to essential goods, remain well below the pre-pandemic trend in many countries. Real wages compared to the cost of those goods and services have also lost strength during inflation.

“An excessively rapid change in any – or both – of these relative prices would create inflationary pressure”, said Carstens, adding that it would mean “a gradual decrease in prices or even, in the extreme, an increase in the rate.”

It was of the opinion that the rate cut should not be accelerated.

“An early rate cut could reinvigorate inflationary pressures and force costly policy changes,” the BIS report said.