How markets are willing to “do the dirty work” of fighting Le Pen

The Bank for International Settlements (BIS), often called the central bank of central banks, warned in its annual economic report that governments were accumulating too much debt.

“Fiscal trajectories represent one of the greatest threats to macroeconomic and financial stability in the medium and long term,” he said.

While before Covid, this phenomenon was masked by the long phase of exceptionally low interest rates, the cost of debt has exploded since the pandemic.

Not all governments have reduced their spending since the end of confinement.

“In some cases, fiscal policy continues to stimulate the economy, acting counter to monetary policy. In the absence of consolidation measures, debt ratios are expected to increase over time,” the institution said.

Asked about the French election, Agustín Carstens, the boss of the BIS, mentioned the fate of Liz Truss to highlight the risk of borrowing and spending too much without taking into account the willingness of markets to continue lending.

Markets “can surprise you, often without warning, you know,” he said.

“An example could be what happened in the UK in 2022. It was managed well in the end, but it generated points of tension in the markets.

“You really want to avoid that. This is a good time to start thinking about it: you don’t want to expose yourself to such circumstances.

Iain Begg, a professor at the European Institute at the London School of Economics, warns that markets will be shaken if Le Pen wins a majority.

“Next week is a week of uncertainty, and I’m sure that will translate into negative sentiment towards France,” he said.

“There is still an outside chance of obtaining an absolute majority for the RN. If this happens, Macron will be under strong pressure to appoint an RN Prime Minister, and we will then see if they are persuaded to continue the more Trussite economic policy.”