Rising sovereign debt could disrupt global financial markets, the head of the body that advises central banks said on Sunday ahead of France’s high-stakes parliamentary elections.
Agustín Carstens, chief executive of the Bank for International Settlements (BIS), said the global economy was heading for a “soft landing” after the inflation crisis, but he warned that policymakers, especially politicians, needed to be cautious.
Global sovereign debt is already at record levels and elections, from the US presidential election in November to the recent polls in Mexico and South Africa, and elections in France and Britain in the coming week, all pose risks.
Emmanuel Macron’s decision to call early elections in France has sent the country’s bank shares crashing and bond markets into panic, exacerbating concerns about fiscal sustainability in the eurozone’s second-largest economy.
Polls released ahead of the first round of voting on Sunday indicated that the far right could win the largest share of the vote given record turnout.
Carstens said the BIS was not criticizing “one or two” governments, but that the message was clear.
“She [governments] “We need to stop the rise in government debt and accept that interest rates may not return to their ultra-low pre-pandemic levels,” he said. “We need a solid foundation to build on.”
As interest rates are not about to return to ultra-low levels and cost pressures from an aging population, climate change and rebuilding defense capabilities, economic stimulus plans and a general increase in protectionism could unsettle sensitive markets, the BIS warned in its annual report.
“They can surprise you without much notice,” Carstens told reporters, pointing to the turbulence in British markets after then-Prime Minister Liz Truss’s budget plans left some pension funds on the brink of collapse. “You really want to avoid that.”
France’s main parties have all promised new spending. Macron’s government had pledged to cut the budget deficit from 5.5% of gross domestic product last year to a ceiling of 3% for the European Union by 2027 – a target that will be met after the vote, which ends with a second round on July 7, may not be feasible.
If it forms a government, Marine Le Pen’s National Rally (RN) wants to cut value added tax (VAT) on energy, which it says would cost 7 billion euros for the rest of this year and 12 billion in a year euros. Full year. The RN would also scrap an increase in the retirement age in 2023 from 62 to 64, saying the spending plans would be paid for by cutting contributions to the EU budget.
The left-wing alliance New Popular Front, now in second place, says the first steps would include a 10% pay rise for civil servants, the provision of free school meals, supplies and transport, while housing subsidies would be increased by 10%.
The unrest has sent the French government’s costs of servicing its debt on international markets soaring, with the risk premium, or spread, that holders of French government bonds demand over German sovereign debt rising to its highest level since 2012.
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France’s blue-chip CAC 40 index has fallen 6% since Macron dissolved parliament, with French banks among the biggest losers. The big three – Société Générale, BNP Paribas and Crédit Agricole – are down 10%-14% since Macron’s announcement.
French banks are heavily indebted and are expected to suffer if borrowing costs rise sharply.
The positive for Carstens was that central banks have successfully reined in inflation, which peaked for decades after the Covid-19 pandemic and then Russia’s 2022 invasion of Ukraine, which hit commodity markets caused commotion.
“Compared to last year, I must say we are in a much better position,” said the former governor of Mexico’s central bank.
While Carstens said central banks deserved praise for navigating a difficult path that could have led to a wave of recessions, he added that they needed to persevere, comparing the fight against inflation to a course of antibiotics to tackle an illness.
He described an “extreme” scenario in which inflation would flare up again and central banks would have to raise interest rates further. But that is not what the BIS expects.