BIS warns of global financial fractures from trade tensions and geopolitical divides

According to Reuters, Augustin Carstens, the general manager of BIS, stated that the trade war led by the United States and other policy changes are undermining the long-standing economic order.

He remarked that the global economy is at a "crossroads" and entering a "new era of increased uncertainty and unpredictability," which is testing public confidence in institutions, including central banks.

This BIS report was published just one week before the deadline for President Donald Trump's trade tax measures on July 9, following six months of severe geopolitical upheaval.

Carstens pointed out that the rising protectionism and fragmentation of trade are "particularly concerning" because these factors are exacerbating the decline in economic growth and productivity, which has been a trend for decades.

Furthermore, there is evidence suggesting that the global economy's ability to recover from shocks is diminishing, with factors such as an ageing population, climate change, geopolitics, and supply chain issues all contributing to greater economic volatility.

Carstens added that the increasing levels of debt are unsustainable, and higher military spending could push debt levels even higher.

BIS’s chief economic adviser, Hyun Song Shin, also highlighted the significant depreciation of the US dollar, which has fallen by 10% since the beginning of the year, marking the largest half-year decline since the introduction of floating exchange rates in the early 1970s.

He noted that there is no evidence yet to suggest that this is the beginning of a "great rotation" out of US assets, as some economists have suggested, but acknowledged that it is too early to draw conclusions, as sovereign wealth funds and central banks are moving slowly.

However, short-term analysis indicates that hedging by non-US investors holding US government bonds and other US assets seems to have played a significant role in the dollar's depreciation in recent months.

As for the financial position of BIS itself, the bank reported a net profit of 843.7 million Special Drawing Rights (SDRs) from the IMF, equivalent to US$1.2 billion. BIS's total income reached a record high of 3.4 billion SDRs, equivalent to US$5.3 billion. Additionally, foreign currency deposits at the bank also reached new record levels.

Carstens stated, "It is crucial that BIS maintains the highest creditworthiness among all institutions."