Top central banker warns: Cut borrowing or you will face a debt crisis

A top central banker warned that governments must stop “relentless borrowing” or they risk plunging into a global debt crisis.

Agustin Carlstens, the head of the Bank for International Settlements (BIS), a global club for central bank chiefs, has warned world leaders that rates will not be returning to recent lows anytime soon.

Continued heavy borrowing could plunge economies into crisis, unless the weakened public finances are urgently addressed.

Mr Carstens stated: “Fiscal Authorities have a short window to put their house in order, before the public loses faith in their commitments.

He added that “financial markets could remain calm despite large imbalances, until one day they suddenly no longer were”, without mentioning which countries might be at risk.

“That’s why fiscal consolidation needs to begin now in many economies. It is not enough to muddle through. Current policies in many countries indicate that public debt will continue to rise steadily over the next decade.”

The warning from the financial markets about a lack of confidence reminds us of the crisis that ensued after Liz Truss’ mini-Budget of the fall of 2022. The bond yields soared after the announcement of unfunded tax reductions, forcing the Government abandon its pledges and eventually bringing down Truss’s administration.

M. Carstens said that governments have accumulated mountains of debt based on a false assumption, that interest rates will remain low for ever.

He said: “It’s imperative that fiscal authorities curb the relentless increase in public debt.”

The low interest rates that followed the Global Financial Crisis inflated fiscal accounts. The fiscal authorities were able to ignore the high debt and large deficits that seemed inevitable. “But the days of ultra low rates are gone.”

Mr Carstens warned of a major challenge in improving the public finances, given the sustained pressure from politicians around world to increase expenditure.

The central banker stated: “Demands to increase public spending will continue to grow, not least because of population ageing, the climate change, and in many jurisdictions higher defence expenditure.”

He said that improving the public finances will bring long-term benefits.

In a speech at the Goethe University, Frankfurt, Mr Carstens stated: “Fiscal Health is not just about avoiding crisis. It has material benefits, too.”

He cited Germany as a rare case of a nation that adhered to strict borrowing regulations to keep debt under control.

Germany’s debt was just below 66pc at the end last year. This compares to 104pc in the UK and 123pc in the US.

Berlin borrows for 10 years at an interest rate of less than 2,5pc. On the financial markets, both the UK and US face yields of over 4pc for comparable bonds.

According to official estimates published along with the Budget, Britain’s Treasury will spend more than £100bn this year on interest payments.

Mr Carstens stated: “The lower interest rates on long-term loans and the lower debt service burdens that Germany enjoys in comparison with other advanced economies are prime examples [of lower borrowing].

Carstens said that central banks should also maintain high interest rates in order to eliminate inflation.

He said, “There will be bumps on the road.” The medium-term risks of inflation, such as deglobalisation and economic fragmentation; adverse demographic trends; and the need to combat climate change, reinforce the central banks’ need to remain on course. Only in this manner can the public’s confidence in money be maintained.”

Investors expect that the Bank of England and the European Central Bank, as well as the US Federal Reserve, will cut rates in the next few months.

This Thursday, the Bank of England Monetary Policy Committee will vote on the Bank’s base rate. It is currently set at 5.25pc.

The inflation rate has dropped from 11.1pc to 4pc, which is still double the 2pc target.