24 June 2018

Financial Times: BIS warns of ‘disciplining force’ of financial markets

Agustín Carstens, general manager of the central bankers’ bank, said: “Some markets are overstretched and so investors will be very jittery. There is less space for taking adventurous steps. Markets will be more volatile and more sensitive to adjustments in interest rates.”

Mr Carstens also said investors had become “a disciplining force”, citing the recent rise in Italian government borrowing costs after a now-rejected plan by Rome’s new coalition government for the European Central Bank to write off all their holdings of Italian debt — a move which the general manager said “sent all the wrong signals”.

Mr Carstens’ remarks highlight the difficulty facing economic policymakers who need to ensure growth remains on track, while taking onboard markets’ concerns about high debt levels in a world where central bank borrowing is no longer so cheap and plentiful.

Central banks across advanced economies are continuing to remove the support that they have provided following the worst crisis since the Great Depression, despite mounting threats to the global economic outlook. But there is little space for governments to fill the void even if those threats, such as a prolonged period of trade tension — and its possible escalation — materialise without triggering market turmoil.

With investors having to prepare for higher rates, governments would be unable to offset a slowdown in growth through boosting their spending due to high levels of debt. The BIS said in its closely watched annual report, that public debt had risen to new peacetime highs and that small, open emerging markets where businesses had borrowed heavily in US dollars were particularly exposed to higher borrowing costs in the US. There had been an “excessive reliance” on easy monetary policy to boost growth, the BIS said.

“Emerging markets don’t really have space for poor fundamentals,” Mr Carstens said. “There is a risk of volatility in emerging markets, especially among companies with high amounts of debt.”

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Mr Carstens speech

© BIS - Bank for International Settlements