‘Govts must stop relentless borrowing’ – Top Central Banker warns

Mar 20, 2024 News

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– risk plunging world into debt crisis

The Telegraph – Governments must stop their “relentless” borrowing or risk plunging the world into a debt crisis, a top central banker has warned.

Agustin Carstens, who leads the Bank for International Settlements, a global club of central bank bosses, warned global leaders that interest rates would not return to their recent lows soon. As a result, continued heavy borrowing risks plunging economies into crisis unless battered public finances are urgently improved.

Mr. Carstens said: “Fiscal authorities have a narrow window in which to get their house in order before the public’s trust in their commitments starts to fray. “Financial markets can remain calm in the face of large imbalances until suddenly, one day, they no longer are,” he added, without specifying which countries may be at risk. “That is why fiscal consolidation in many economies needs to start now. Muddling through is not enough. In many countries, current policies imply steadily rising public debt in the coming decade.” The warning about a loss of confidence from financial markets recalls the crisis that followed Liz Truss’s mini-Budget in the autumn of 2022. Bond yields surged after unfunded tax cuts were announced, forcing the Government to abandon the pledges and ultimately bringing down the Truss administration.

Carstens warning comes amid growing concerns in Guyana regarding the country’s mounting debt. At the end of 2022 the country’s debt stood at US$3.6 billion and by the end of 2023 it increased to US$4.5 billion plunging Guyana some 23 percent deeper in debts. This year the Government of Guyana (GoG) has set aside $44 billion in the budget to service its ballooning debt. Vice President and former Finance Minister, Bharrat Jagdeo during a news conference in January announced that $44B or approximate US$220M of the country’s $1.46 Trillion budget will go towards serving debts. In 2023, some US$177.3 million in revenue went towards debt service, up from US$150.2 million in 2022. The growing payments to service the country’s debt stems from a conscious decision of policy makers that believe Guyana’s forecast of revenue from the oil and gas sector justifies its borrowing agenda.

Meanwhile, Carstens said that mountains of debt built up by governments around the world have been based on the false assumption that interest rates would stay low forever. He said: “It is imperative for fiscal authorities to curb the relentless rise in public debt. “The post-Global Financial Crisis low interest rate environment flattered fiscal accounts. Large deficits and high debt seemed sustainable, allowing fiscal authorities to avoid hard choices. But the days of ultra-low rates are over.”

Mr. Carstens warned that improving public finances will be a significant challenge given sustained political pressure around the world for more expenditure. The central banker said: “Demands for more public spending will only increase, not least due to population ageing, climate change and, in many jurisdictions, higher defence spending.”

However, he said improving public finances would bring benefits in the long run. In a lecture at Goethe University in Frankfurt, Mr Carstens said: “Fiscal health is not only about avoiding crises. It also brings material benefits.”

He highlighted Germany, which is a rare example of a country that has stuck to strict borrowing rules to keep a lid on debt. Germany’s national debt stood at just under 66pc of GDP at the end of last year, compared to 104pc for the UK and 123pc for the US. Lenders charge interest accordingly: Berlin pays an interest of less than 2.5pc to borrow for 10 years. The UK and US both face yields in financial markets of more than 4pc on comparable bonds. It means Britain’s Treasury is going to spend more than £100bn on debt interest this year, according to official forecasts published alongside the Budget.

Mr. Carstens said: “The lower long-term interest rates and debt service burdens enjoyed by Germany, compared with some of its advanced economy counterparts, are a prime illustration [of the benefits of lower borrowing].”

Central banks must also keep interest rates high to make sure inflation is completely eradicated, Mr. Carstens added. He said: “There will surely be more bumps in the road. The medium-run risks to inflation – such as deglobalisation, economic fragmentation, adverse demographic trends and the need to fight climate change – reinforce the need for central banks to stay the course. It is only in this way that the public’s trust in money can be preserved.” Investors expect the Bank of England, European Central Bank and US Federal Reserve to cut rates in the coming months. The Bank of England’s Monetary Policy Committee meets this Thursday to vote on its base rate, which currently stands at 5.25pc. Inflation has fallen from its peak of 11.1pc in October 2022 to 4pc in January, but this is still twice its 2pc target.

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• Agustin Carstens, Chief Executive of the Bank for International Settlements, Dr. Bharrat Jagdeo, Vice President, warns

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