The Bank of England is not very optimistic about the French elections. The Bank reckons that the French elections are likely to shake up the world’s financial scene and even the British economy.
Bank of England Warns of a Financial Instability in the UK
The report points out what could happen if the market goes completely out of control when the Rassemblement National, led by Marine Le Pen, takes control of the French Parliament.
So here’s what happens: Ms Le Pen’s plans, like borrowing more money, could cause France’s debt to explode. Which, let’s be honest, is already far too high.
Holders of French bonds could then turn to other countries, causing a flight to other parts of the world and higher borrowing costs for heavily indebted companies and French households.
Vulnerabilities Within the UK’s Financial System
Although the Bank of England notes that the report covers extreme potential options and that market reactions are generally somewhat less sharp than some analysts’ interpretations of the final results.
The report stresses that current conditions in the global economy, such as the recent general election and rising levels of public debt in most major countries, pose serious threats.
In particular, the report mentions the higher likelihood of policy uncertainty, geopolitical factors and fragmentation at a global level as some of the issues that can cause turbulence in international markets, especially in sovereign debt markets.
Apart from the weaknesses identified in the French election, other weaknesses include weak links in the UK’s financial structure, such as the US stock market and private equity.
Each sector has seen rapid growth in the recent past, but the manifestation of leverage is forcing them to adapt to changing funding conditions.
Household Finances and Pressures on the Housing Market
Although the Bank is forecasting a gradual fall in interest rates over the coming months, many households will move to a higher mortgage rate, and therefore higher monthly payments.
This, combined with the depletion of lifetime savings cushions for renters and those on low incomes, can exacerbate the financial risks for vulnerable groups in society.
However, according to the Bank, the UK financial sector appears to be well-prepared to deal with any shocks, as mortgage borrowers are less sensitive to higher interest rates, and interest charges on debt are still lower than in previous crises.
However, this report should be particularly useful in raising public awareness of the integration of global financial markets and the risks that political and economic instability can bring.
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