BIS Warns: Rising Government Debt Amid Key Elections Could Shake Global Markets

The Bank for International Settlements (BIS) has issued a warning about the increasing levels of government debt, especially with several important elections happening this year. The BIS cautioned that this debt could cause disruptions in global financial markets.

The BIS, known as the "central bank for central banks," noted that the global economy appears to be stabilizing despite earlier concerns about high interest rates. However, the BIS emphasized that policymakers and politicians must proceed with caution. With government debt already at record levels, elections in the U.S., Mexico, South Africa, France, and Britain could pose significant risks.

Agustin Carstens, General Manager of BIS, explained that interest rates are not expected to return to their previous ultra-low levels. He also pointed out that other factors, such as aging populations, climate change, and the need to rebuild defense capabilities, are adding financial pressures. These issues, combined with economic stimulus plans and increasing protectionism, could destabilize markets.

"Market turbulence can occur with little warning," Carstens said, referring to the market chaos in Britain following former Prime Minister Liz Truss’s budget proposals, which nearly caused pension funds to collapse. "We need to avoid such situations."

In addition to ongoing concerns about U.S. debt, the French debt risk premium has surged to its highest level since the eurozone crisis in 2022. This increase followed President Emmanuel Macron’s call for a snap parliamentary election, which could result in a far-right government.

While the BIS did not single out any specific governments, the message was clear. "Governments need to control the rise in public debt and accept that interest rates may not return to pre-pandemic lows," Carstens said. "A stable foundation is crucial for future growth."

Progress in Controlling Inflation

On a positive note, central banks have made significant progress in controlling inflation, which had reached decades-high levels after the COVID-19 pandemic and Russia’s 2022 invasion of Ukraine disrupted commodity markets.

"We are in a much better position compared to last year," Carstens said as the BIS released its annual report.

Carstens praised central banks for navigating challenging times that could have led to widespread recessions but stressed the importance of continued efforts. He compared the fight against inflation to completing a course of antibiotics, where stopping too soon could lead to a relapse.

The BIS report also advised against cutting interest rates prematurely. "Premature easing could reignite inflation and force a costly policy reversal," the report warned.

Also Read: Global Stocks Under Pressure from French Election Risks and Rate-Cut Delays