Rising levels of government debt could disrupt global financial markets, the head of a body that advises central banks said on Sunday ahead of French parliamentary elections.
Agustín Carstens, director general of the Bank for International Settlements (BIS), said the world economy was on the way to a “soft landing” from the inflationary crisis, but warned that politicians, especially politicians, needed to be careful.
Global government debt is already at record levels, and elections from November’s US presidential election to recent polls in Mexico and South Africa and elections in France and Britain this coming week all carry risks.
Emmanuel Macron’s decision to call early elections in France sent bank shares tumbling and bond markets jittery, exacerbating concerns about fiscal sustainability in the eurozone’s second-largest economy.
Polls published ahead of Sunday’s first round of elections suggested that the far right could win the largest share in a record turnout.
Carstens said the BIS is not calling out any “one or two” governments, but that the message is clear.
“They [governments] they need to reduce the rise in public debt and accept that interest rates may not return to ultra-low pre-pandemic levels,” he said. “We need a solid foundation to build on.”
With interest rates not set to return to ultra-low levels, and cost pressures from an aging population, climate meltdowns and the rebuilding of defense capabilities, economic stimulus plans and a general rise in protectionism could unsettle sensitive markets, the BIS warned in its annual report. .
“They can surprise you without much warning,” Carstens told reporters, pointing to the turmoil in British markets after then-Prime Minister Liz Truss’ budget plans put some pension funds at risk of collapse. “You really want to avoid that.
All major French parties have pledged new spending. Macron’s government has pledged to reduce the budget deficit from 5.5% of gross domestic product last year to the European Union’s ceiling of 3% by 2027 – a goal that may be out of reach after the vote, which ends in a second round on July 7.
If she forms a government, Marine Le Pen’s National Assembly (RN) wants to cut value added tax (VAT) on energy, which she says would cost €7bn (£5.9bn) for the rest of this year and €12bn for the year as a whole year. The RN would also scrap the increase in the retirement age in 2023 from 62 to 64 and says its spending plans would be paid for by cuts in EU budget contributions.
The left-wing New People’s Front alliance, now second in the poll, says its first steps would include a 10% pay rise for civil servants, providing free school lunches, supplies and transport, while increasing housing subsidies by 10%.
The unrest has sent the French government’s cost of servicing its debt on international markets skyrocketing, with the risk premium, or spread, demanded by holders of French debt over German growth at its highest level since 2012.
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France’s blue-chip CAC 40 has fallen 6% since Macron dissolved parliament, with French banks among the biggest losers. The Big Three – Société Générale, BNP Paribas and Crédit Agricole – have fallen 10-14% since Macron’s announcement.
French banks have a large amount of debt and are expected to suffer if borrowing costs rise significantly.
On the plus side for Carstens, central banks successfully reined in inflation, which hit multi-decade highs after the Covid-19 pandemic, and then Russia’s 2022 invasion of Ukraine, which roiled commodity markets.
“Compared to last year, I have to say that we are in a much better place,” said the former governor of Mexico’s central bank.
Although Carstens said central banks deserved credit for navigating a difficult path that could have resulted in a wave of recession, he added that they needed to persevere, comparing the fight against inflation to being treated with antibiotics to deal with a disease.
He described an “extreme” scenario where inflation rose again and central banks had to raise rates further. But BIS does not expect that.