Rising government debt levels could disturb global financial markets, the head of the body that advises central banks said on Sunday before France’s high-stakes parliamentary elections.
Agustín Carstens, the general manager of the Bank for International Settlements (BIS), said the world economy was on course for a “smooth landing” from the inflation crisis, but he warned that policymakers, especially politicians, needed to be careful.
Global government debt is already at record levels and elections ranging from the US presidential vote in November, to recent polls in Mexico and South Africa, and votes in France and Britain in the coming week, all carry risks.
Emmanuel Macron’s decision to call a snap election in France has sent the country’s bank stocks crashing and alarmed the bond markets, exacerbating fiscal sustainability concerns in the eurozone’s second-largest economy.
Polls released before the first round of voting on Sunday suggested the far right could win the largest share of the vote, amid record turnout.
Carstens said the BIS was not calling out any “one or two” governments but that the message was clear.
“They [governments] must cut short the rise in public debt and accept that interest rates may not return to the pre-pandemic ultra-low levels,” he said. “We need a solid foundation to build upon.”
With interest rates not about to go back to ultra-low levels, and cost pressures from ageing populations, climate breakdown and rebuilding defence capabilities, economic stimulus plans and a general rise in protectionism could unsettle sensitive markets, BIS warned as it published its annual report.
“They can surprise you with not much notice,” Carstens told reporters, pointing to the turbulence in Britain’s markets after then prime minister Liz Truss’s budget plans, which put some pension funds at risk of collapse. “You really want to avoid that.”
France’s main parties have all promised new spending. Macron’s government had promised to cut the budget deficit from 5.5% of gross domestic product last year to a European Union ceiling of 3% by 2027 – an objective that may be unattainable after the vote, which concludes with a second round on 7 July.
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 €7bn (£5.9bn) for the rest of this year and €12bn in a full year. The RN would also scrap a 2023 increase in the retirement age to 64 from 62, and says its spending plans would be paid for by cutting contributions to the EU budget.
The left-wing New Popular Front alliance, now polling second, says its first moves would include a 10% civil servant pay hike, providing free school lunches, supplies and transport while raising housing subsidies by 10%.
The turmoil has sent the cost to the French government of servicing its debt on the international markets rocketing, with the risk premium, or spread, demanded by holders of French debt over Germany’s rising to its highest level since 2012.
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France’s blue-chip CAC 40 index is down 6% since Macron dissolved parliament, with French banks having been among the biggest losers. The big three – Société Générale, BNP Paribas and Crédit Agricole – are down 10%-14% since Macron’s announcement.
French banks have a large amount of debt and are expected to suffer if credit costs increase sharply.
The positive for Carstens was that central banks have successfully reined in inflation, which had hit decades-long highs after the Covid-19 pandemic, and then Russia’s 2022 invasion of Ukraine, which riled commodity markets.
“Compared to last year, I have to say we are in a much better place,” the former Mexican central bank governor said.
Although Carstens said central banks deserved praise for navigating a difficult path that could have resulted in a wave of recessions, he added that they needed to persevere, likening the inflation fight to a course of antibiotics to tackle an illness.
He described an “extreme” scenario where inflation raced up again and central banks needed to raise rates further. But that is not what the BIS expects.
