Rising government debt poses serious risks to global financial stability.

 

BIS Warns on Government Debt

The Bank for International Settlements (BIS) has issued a stark warning about the dangers of rising government debt levels. In its annual global economy report, the BIS highlighted that excessive borrowing could destabilize financial systems and exacerbate inflation. Governments worldwide are advised to curb borrowing to avoid crises like the one that hit the UK in 2022, where a sudden loss of investor confidence led to soaring borrowing costs and market turmoil.

Fiscal Sustainability Concerns

Claudio Borrio, head of the BIS economic department, emphasized the importance of fiscal sustainability, noting that financial markets might abruptly lose confidence in a government's ability to manage its debt. This scenario was vividly illustrated in the UK when a surge in government bond yields caused significant market disruptions.

The BIS's warning coincides with political developments in France, where the National Rally party is projected to win the most seats in a surprise legislative election. The party's promises of increased spending are raising concerns, particularly as France's budget deficit reached 5.5% of GDP in 2023, well above the EU's 3% limit.

Global Debt Trends

The U.S. faces similar challenges, with the International Monetary Fund (IMF) predicting that its government debt could hit a record 140% of GDP by 2032 without changes to taxation and spending policies. The BIS noted that the pre-pandemic era of low interest rates masked the true cost of debt, but recent increases in spending demands and debt servicing costs have brought the issue to the forefront.

Risks and Solutions

High borrowing levels stimulate the economy, complicating efforts to control inflation. The BIS report indicates that while global inflation rates are expected to decline without severe economic downturns, central banks should remain cautious. Agustin Carstens, BIS general manager, urged governments to act preemptively to avoid political and social unrest, such as the protests in Kenya against tax hikes.

Despite these challenges, the BIS sees a potential for a smooth economic landing if managed carefully. However, it warned against lowering interest rates prematurely, as persistent wage and service price increases, or sudden spikes in commodity prices, could reignite inflation. Central banks must be ready to adjust interest rates if necessary to maintain economic stability.

 

Balancing fiscal policies to ensure economic stability.