Markets
Market confidence could collapse rapidly, BIS warns indebted 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.
“Although financial market prices point to only a small likelihood of fiscal stress at present, confidence could quickly collapse if economic momentum weakens and there is an urgent need for public spending on both the structural and cyclical fronts,” the ECB said. BIS stated this in an annual report released Sunday. “Government bond markets would be the first to be hit, but tensions could spread more widely, as they have in the past.”
The BIS did not single out any particular nation, but warned advanced economies against running fiscal deficits above 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 win voter support.
According to some cryptocurrency experts, both bitcoin and gold they set the prices a fiscal crisis in the United States and other advanced nations. So-called zero-yielding assets have risen 48% and 13%, respectively, this year, presumably due to safe-haven demand. While cryptocurrency advocates see BTC as an antithesis to fiat malaise, the cryptocurrency has tended to fall in line with other risk assets during times of stress.
Public debt to GDP ratio it skyrocketed worldwide since 2020, a direct result of the coronavirus pandemic that forced governments to significantly increase spending while facing declining revenues. Concomitant rapid rate hikes by central banks increased the fiscal burden. At the end of 2023, the U.S. debt-to-GDP ratio it 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.
However, the BIS urged central banks to set “an elevated level of monetary policy easing.”
“A premature easing could reignite inflationary pressures and force a costly policy shift, all the more costly because credibility would be compromised. Indeed, the risks of unanchored inflation expectations have not disappeared, as pressure points remain,” the BIS said.
The BIS added that fiscal consolidation will ultimately reduce the need to keep interest rates high.
“For fiscal policy, consolidation is a top 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.