Governments across the world are at risk of imploding if they fail to tackle spiralling debts, the Bank for International Settlements (BIS) has warned.
Highly indebted countries must act to reduce their deficits before it is too late, the institution said, as the threat of higher borrowing costs risks making the situation worse.
Financial markets could be pushed to breaking point should they fail to act, the BIS said, which is known as the central bank for central bankers.
Claudio Borio, an economist at the BIS, said: “Government debt trajectories represent the most serious threat to macroeconomic and financial stability longer-term.
“At some point, and we cannot tell when, financial markets will no doubt pay even more attention unless authorities correct their course.
“It takes time for policymakers to adjust policies, and if they wait for markets to wake up, it is going to be too late.”
Asked if governments around the world were risking the type of shock that swept the UK in the wake of Liz Truss’s mini-Budget in 2022, Mr Borio said: “That is an example of the things that could happen.”
Ms Truss’s proposals set off a chain of events in financial markets that sent UK borrowing costs spiralling and ultimately brought down her government.
The US economy is already borrowing heavily under President Joe Biden, and his incoming replacement, Donald Trump, is expected to increase the national debt pile to fund tax cuts.
Meanwhile, the French government collapsed last week as it struggled to convince parliament to back a budget aimed at reducing its annual borrowing through a combination of spending cuts and tax increases.
Both economic developments have already sent shockwaves across financial markets, as bond investors gear up to fund the countries’ yawning deficits.
In France’s case, investors have already increased the premium they charge Paris to borrow compared to Germany, in a growing recognition that the Government is struggling to get its finances under control.
Wake-up call
But it is a phenomenon across much of the world.
“We have seen emerging signs of market participants’ growing discomfort with the need to absorb the burgeoning supply of public debt,” said Mr Borio.
BIS’s quarterly report also noted how Rachel Reeves’s recent Budget plans for more borrowing in the UK.
“A ‘wake up moment’ looks like a sharp adjustment in bond yields that ultimately forces policymakers to focus,” said Mr Borio.
“That can be quite disruptive, especially because government bond markets are benchmark markets for the pricing of all sorts of assets.”
In the US’s case, a blow-up in bond yields would hit the entire global economy.
“There is a certain US exceptionalism because of the outsized role of the dollar in the global financial system, but that works both ways,” said Mr Borio.
“It means it can take much longer for the specific mechanisms and warning signs to show up, but it does mean that once they show up the impact on the global economy is bigger.”
Meanwhile, France “is yet another clear case that sovereign debt is one of the biggest threats going forward, if not the biggest threat going forward, in the global economy”, he added.
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