This opinion is not only for the bankers: financial services professionals are almost obsessive “readers of tea leaves” when it comes to central bank statements. The cost and value of money are the foundations of this industry. Helpfully, in late June every year, the BIS annual economic statement serves to summarize central bankers’ work at the global level and resets our community’s thinking[1]. The reset only lasts a few days or weeks before events change the context, but there is a second moment for broad, global communication, which comes at the central bankers’ annual retreat in late August. I will write an opinion at that time, too.
A link to the report is provided in the footnote below.
From Resilience to Robustness?
Investment in artificial intelligence ecosystems has enabled global growth to somewhat counterbalance the drag of major tariff hikes. Geopolitical headwinds and rising fiscal and financial fragilities remain. Public debt and deficits are ever less sustainable; ministries of finance are not unambiguously behind the need for price stability or for implementing more effective prudential oversight. Progress in these areas would enhance trust in the capacity of economic policies to deliver better, more robust outcomes for households and businesses.
Four Pressure Points
First, inflation has risen. The energy supply shock has been historic. Global headline inflation picked up shortly after the conflict in the Middle East began, and prices of plastics and fertilizers – key inputs – have risen by 30% and 50%, respectively. Will these initial price increases broaden and persist as they did during 2021–23? Some labor market slack may help to contain wage pressures, and interest rates are higher now than in 2022. It may take several quarters to purge the imbalances in these physical goods markets, and longer if the fighting and uncertainty occur.
Second, the optimism surrounding AI may not last, despite its promise of future productivity gains. Capital expenditure at recent levels could prove unsustainable if supply bottlenecks hit production. The fight for market leadership may fuel further overinvestment, increasing the risk of a sharp reversal if AI promises evaporate. We have witnessed such patterns before, e.g., in the dot-com bubble in the late 1990-ties.
Third, financial vulnerabilities persist. Easy financial conditions could tighten and amplify credit problems, especially - once again - if AI does not meet the sales pitch. Current low-risk premiums and stretched earnings valuations underscore the scale of potential unwinding. Core public markets are highly leveraged, and private credit and equity instruments have grown enormously, much of that capital also going into AI. The current environment has elevated macroeconomic risks, which could lead to abrupt declines in value and liquidity provision.
Fourth, fiscal pressures are mounting. Even with public debt at a historically high level, governments must manage commodity shocks and rapid increases in defense spending. The financial environment is even less accommodating than the one prevailing after the Great Financial Crisis. Worse, GDP growth has also slowed from post-pandemic peaks. Consequently, public debt interest payments as a share of GDP have risen across many countries. Compounding these fiscal challenges, the structures of sovereign bond markets have become more fragile.
Old and New Fiscal-Financial Stability Interconnections
When it comes to money, the central tension in every corner of the world is summarized by the interplay of budget pressures and central bank actions, the fiscal and the monetary elements.
At least since 2008, if there is such a thing as a global average, fiscal policy has expanded aggressively during downturns but has not usually adjusted much in periods of renewed growth, even with rising public debt. Fiscal pressures are now worsened by population aging, defense spending, and climate change. How far capital markets stretch is a matter of prices acceptable to capital providers, at least until the music stops. Another vulnerability/variable has been the far greater role of alternative funds in intermediating government debt in several core markets, with highly leveraged strategies based on favorable short-term financing.
This evolving landscape has given rise to a novel interplay between fiscal/monetary stability. Stresses can now propagate quickly and broadly through funding markets, across borders, and between banks and non-banks. Government bond market liquidity may seem ample for extended periods, but vanish abruptly. This, in turn, means that budget space can shrink well before public debt reaches limits as understood by historical metrics. Central banks face more frequent fiscal risk repricing, more complex monetary policy transmission, and more market dysfunction. More frequent repricing of fiscal risk and fragile liquidity would make sovereign yields even more volatile.
A change in market sentiment on fiscal risk may be inflationary if it triggers a fall in the exchange rate or changes inflation expectations. Higher public debt also impedes the transmission of monetary policy. When public debt is high, rate hikes raise government interest payments, thereby transferring income to bondholders while reducing the value of financial intermediaries’ holdings and affecting their Basel III capital ratios. Other unknowable events and market complexity make the macroeconomic effects hard to estimate.
How to fix market dysfunction is always a worry for central bankers. But repeated interventions - and even the suggestion of them - through large-scale asset purchases or lending operations risk creating moral hazard for both financial markets and sovereign borrowers. These, in turn, can encourage greater risk-taking by financial intermediaries and undermine fiscal discipline, both of which would complicate the task of stabilizing inflation.
Stablecoins
Payments are central to the Bank for International Settlements; they are in the institution’s very name. Central banking is about trust; money must be accepted for payment without question. For decades, central banks have combined managed fiat money – the ultimate safe settlement asset – with private sector intermediation. Central bank money is redeemable at par, liquidity is supplied elastically, and integrity is upheld all day, every day. The public/private two-tier system works and has delivered trust.
These essential qualities remain the benchmark for judging new technologies and instruments that aspire to be money. The current structures for central bank money can be improved; they struggle with fragmentation across legacy systems, increasing costs, rising operational risks, and limited competition. Innovative proposals include rebuilding the underlying infrastructure using new technologies, such as distributed ledger technology and tokenization.
For some years, stablecoins have attracted the attention of global central bank and treasury officials, and the 2026 BIS report reviews them at length. They have emerged as money-like[2] instruments on public permissionless blockchains, but they fall short of what central bankers would consider money. Their value varies, and the current infrastructure shows fragmentation and has limited scalability. “Unhosted” wallets without KYC checks raise integrity red flags.
If stablecoins were widely adopted, there could be macro-financial implications. Credit provision, financial stability, monetary policy transmission, and fiscal space could all be affected. For instance, greater household demand for stablecoins could make banks’ funding more expensive and less stable. This could dampen credit supply and increase risks to publicly supervised financial institutions. Higher demand for sovereign bonds by stablecoin issuers could reduce governments' interest expenses and create fiscal space in some issuing jurisdictions, while adversely affecting others. The nature and size of these effects are highly uncertain and would depend on the size of stablecoin adoption, their design, and regulation. In economies with relatively weak macro-financial fundamentals, high demand for foreign stablecoins could potentially undermine local monetary management.
[1] https://www.bis.org/publ/arpdf/ar2026e.pdf
[2] Money-like is not money. It is an approximation.