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Indebted countries are vulnerable to a precipitous loss of confidence even though that risk is barely acknowledged in bond markets, the Bank for International Settlements warned.\u00a0<\/p>\n
The Basel-based institution said in its\u00a0annual economic report<\/a>\u00a0released on Sunday that countries whose bloated fiscal positions are further stretched by higher interest rates should prioritize fiscal repair. Claudio Borio, head of the BIS\u2019s monetary and economic department, said they must act \u201cwith urgency.\u201d<\/p>\n \u201cWe know from experience that things look sustainable until suddenly they no longer do,\u201d he told reporters. \u201cThat is how markets work.\u201d<\/p>\n While the need to fix public finances has been a recurring theme for the BIS, the remarks coincide with heightened scrutiny on indebted economies. Worries about France this month prompted investors to demand the highest premium on its bonds since 2012.\u00a0<\/p>\n The Basel officials didn\u2019t specify any country in particular, but they did feature a chart looking at the debt and market pricing of some of the world\u2019s biggest borrowers, including Japan, Italy, the US, France, Spain and the UK.<\/p>\n In order to stabilize finances, advanced economies can this year run deficits no larger than 1% of gross domestic product, down from 1.6% last year, the BIS said. That\u2019s a fraction of the\u00a0current US deficit<\/a>, which the\u00a0International Monetary Fund<\/a>\u00a0described last week as \u201cmuch too large.\u201d<\/p>\n \u201cThough financial market pricing points to only a small likelihood of public finance stress at present, confidence could quickly crumble if economic momentum weakens and an urgent need for public spending arises on both structural and cyclical fronts,\u201d the BIS said. \u201cGovernment bond markets would be hit first, but the strains could spread more broadly.\u201d<\/p>\n Inflation is subsiding however, BIS officials acknowledge. The world is currently set for a \u201csmooth landing,\u201d General Manager Agustin Carstens said.<\/p>\n Services still pose a risk to that outlook, with prices in that area out of step with pre-pandemic trends, the report said. In addition, increases in the cost of commodities due to geopolitical tensions could reignite inflation.\u00a0<\/p>\n Given these pressure points, officials highlighted that central banks should be cautious about cutting rates too soon. That could prove costly to their reputations if such policy needs to be reversed amid a flare-up of inflation again, the report said.\u00a0<\/p>\n Policymakers already did their fair share to contribute to that problem, the BIS suggested, repeating its accusation that \u201cwith the benefit of hindsight,\u201d pandemic-era stimulus probably raised the risks of second-round effects.<\/p>\n While central banks shouldn\u2019t ease too soon, governments also have a part to play with too-loose fiscal policy, officials said. Instead, they should widen tax bases and deliver structural reforms to meet future challenges including demographic shifts and climate change.<\/p>\n \u201cOur main message is that central banks alone cannot deliver a durable increase in economic growth and prosperity,\u201d Borio said. \u201cLaying the foundation for a brighter economic future also requires actions from other policymakers, especially governments.\u201d<\/p>\n<\/div>\nSubscribe to the Fortune Next to Lead newsletter to get weekly strategies on how to make it to the corner office. Sign up for free<\/a>.<\/div>\n