In its annual report on the global economy, the Bank for International Settlements (BIS) advised governments to reduce borrowing to mitigate a significant threat to global financial stability and support efforts to control inflation.
BIS warned that escalating levels of debt expose governments to the risk of a crisis similar to the situation in the United Kingdom in 2022. During that crisis, investors withdrew from government bonds, leading to increased borrowing costs, currency depreciation, and sharp declines in capital markets.
The report also noted that before the Covid-19 pandemic, the threat from high and rising debts had been masked by an extended period of near-zero interest rates, which kept debt servicing costs historically low.
Since then, requirements for government spending have risen due to funding energy transitions, geopolitical issues, and the looming burden of aging populations, causing debt servicing costs to rise once again.
According to the bank, taking preemptive action is crucial to avoid serious political disruptions. Additionally, in its annual report, the BIS underscored that excessive government borrowing stimulates the economy, complicating efforts to control inflation.