Markets
Market confidence could quickly crumble, BIS warns debt-ridden nations
The Bank for International Settlements (BIS) warned heavily indebted nations on Sunday of a sudden loss of market confidence, validating long-standing concerns in the cryptocurrency market.
“While financial market prices indicate only a low probability of stress on public finances at the moment, confidence could quickly erode if economic momentum weakens and an urgent need for public spending emerges on both structural and cyclical fronts,” he said. The BIS said in an annual report published on Sunday. “Government bond markets would be hit first, but tensions could spread more broadly, as has happened in the past.”
The BIS did not single out any particular nation but warned advanced economies not to run fiscal deficits larger than 1% of gross domestic product (GDP) this year, down from 1.6% in 2023. The warning could not have been more timely as several nations, including the United States, head to the polls this year, where governments typically increase spending to shore up voter support.
According to some cryptocurrency experts, both bitcoin and gold have been prices a fiscal crisis in the US and other advanced nations. So-called zero-yield assets have surged 48% and 13% respectively this year, reportedly on safe-haven demand. While crypto proponents see BTC as an antithesis to the fiat malaise, the cryptocurrency tends to fall in line with other risk assets during times of stress.
Public debt in relation to GDP went up worldwide since 2020, a direct result of the coronavirus pandemic that forced governments to increase spending significantly while facing declining revenues. Rapid and simultaneous rate hikes by central banks have added to the fiscal burden. By the end of 2023, the U.S. debt-to-GDP ratio was 123%indicating a total debt greater than the country’s economic output.
The consensus in the cryptocurrency market is that rising debt concerns will force the Fed and other central banks to cut rates, spurring more investor inflows into alternative assets like bitcoin. CME’s FedWatch tool shows that traders expect the Fed to cut rates twice this year, by 25 basis points each time.
The BIS, however, called on central banks to set “a high standard for monetary policy easing.”
“A premature easing could reignite inflationary pressures and force a costly policy reversal – all the more costly because credibility would be undermined. Indeed, the risks of unanchored inflation expectations have not disappeared, as pressure points remain,” the BIS said.
The BIS added that fiscal consolidation will eventually lessen the need to keep interest rates high.
“For fiscal policy, consolidation is an absolute priority. In the short term, this would help ease pressure on inflation and reduce the need to keep interest rates high, in turn helping to preserve financial stability,” the BIS noted.