Fiscal debt binge is biggest threat to global stability, BIS says

Bloomberg News

Government borrowing habits pose the biggest danger to world economic stability and recent shifts in market sentiment should serve as a warning, the Bank for International Settlements said.

Presenting the final quarterly report of his career at the Basel-based institution, senior official Claudio Borio delivered a parting shot to nations, saying that public-finance repair should be prioritized before any alarm among bond investors takes hold.

"The global fiscal outlook remains acutely worrying," the retiring head of the institution's monetary and economic department told reporters. "Government debt trajectories represent the most serious threat to macroeconomic and financial stability."

In the report, released on Tuesday, officials observed that in the past three months, Treasury yields touched the average they had between 2007 and 2008, when the global financial crisis was raging. Spreads of U.S. sovereign credit default swaps spiked before the presidential election before narrowing again when Donald Trump was declared the winner.

"There's a certain U.S. exceptionalism because of the outsized role of the dollar in the global financial system," Borio said. "It might take longer for the warning signs to show up. But once they show up, the impact on the global economy is bigger."

The Basel-based BIS has repeatedly warned that public debt around the world risks becoming unsustainable. In June, Borio warned of the danger that countries might confront amid a sudden loss of investor confidence. 

Since then, France faced a spike in bond yields amid its political impasse over a 2025 budget, and the U.K. encountered turbulence over its own fiscal plans.

The BIS also observed that signs of oversupply of government bonds have emerged. 

"Financial markets are beginning to realize that they have to absorb that volume of government debt," said Borio, who has served in his current position for more than a decade as part of a 37-year career at the BIS. 

He said countries need to act to "make sure there are no doubts about fiscal sustainability," before any "sharp adjustment in bond yields" may occur.

The report also said:

• The return of inflation back toward central-bank targets has prompted a disagreement of policymakers and professional forecasters on terminal rates. Aside from natural uncertainties about what exact outcomes monetary policy will yield, this was also due to the "somewhat surprising" resilience of economic activity to higher borrowing costs.
• Countries with less elastic housing-market supply are likely to see a greater impact on property prices than on rents from changes in monetary policy.