The IMF Is Asleep at the Wheel

H ope springs eternal at the International Monetary Fund. Its latest “World Economic Outlook” still expects world economic growth to accelerate from 3.2 percent this year to 3.4 percent in 2027. It does so despite mounting evidence that the U.S. bond market is unraveling, that the French fiscal crisis could trigger another round of the Eurozone sovereign debt crisis, and that a widening Middle East conflict and a super El Niño could spike world energy and food prices. The IMF thus risks being caught flat-footed about a probable global economic downturn in the year ahead, as it was about the 2008–2009 Great Economic Recession.

Start with the U.S. Treasury market, a key influence not only on domestic borrowing rates but on interest rates around the world. Since the start of the year, the all-important ten-year Treasury yield has surged by more than 100 basis points to 5.3 percent, a multi-decade high. The 30-year yield now sits around 5.6 percent. Public debt sustainability concerns, underlined by a budget deficit of 6 percent of GDP and a debt level near its postwar record; massive borrowing by artificial intelligence companies to fund infrastructure investment; and rising inflation expectations are driving yields higher.

The IMF seems to be turning a blind eye to the real likelihood that the Treasury sell-off will accelerate in the year ahead. Next year, Treasury Secretary Scott Bessent will need to borrow $2 trillion to cover the budget deficit and roll over another $10 trillion in maturing Treasury bills and bonds. He will have to do so just as the foreign appetite for Treasuries is waning. Foreigners increasingly view the United States as an unreliable economic partner, one prone to freezing dollar deposits and wielding import tariffs as a weapon of economic warfare. That perception has led the Chinese and Japanese central banks to reduce their Treasury holdings, the French and Dutch central banks to start repatriating their New York gold holdings, and Norway’s sovereign wealth fund to announce that it plans to cut its Treasury holdings by $80 billion in the year ahead.

A further rise in Treasury bond yields risks not only creating a strong headwind to the economic recovery but also breaking something in the financial system. This would seem to be especially the case at a time of high market leverage. Over the past year, stock-market margin debt increased by 50 percent to a record $1.5 trillion, hedge fund leverage increased to nearly all-time highs, and private credit constituted around a third of overall leverage.

As the U.S. bond market’s troubles deepen, so too will those of France, Europe’s second-largest economy, whose public debt is some eight times that of Greece. A French crisis could in turn focus market attention on other countries with unsustainable public finances, such as Italy, Japan, and the United Kingdom. It could also trigger another round of the Eurozone sovereign debt crisis.

There are two reasons to think France could be headed for a full-blown bond market crisis. First, its public debt is already around 120 percent of GDP, and on current policies its budget deficit is projected to rise from 5.4 percent today to 6.8 percent by 2030. Second, France is unlikely to address its budget deficit anytime soon. The first round of its presidential election is scheduled for April 2027, against a backdrop of spreading student and union unrest. Not helping matters are promises by Marine Le Pen, the favored candidate, to lower the pension age and cut the value-added tax on food and energy. Worse still are proposals by Jean-Luc Mélenchon, her likely second-round rival, to cancel the portion of the public debt held by the Banque de France.

Amid bond market meltdowns in the United States and France, the world economy can’t afford more energy and food price shocks. Yet that could very well happen next year. The unresolved Russia-Ukraine war and the widening Middle East crisis, now including Saudi Arabia, could exacerbate the current international oil price shock. Meanwhile, the damage to worldwide agricultural production expected from the “Super El Niño” now raises the prospect of an unwelcome spike in international food prices.

All this news raises a familiar question: What is the value of yet another IMF global economic forecast likely to prove overly optimistic? The IMF would better serve the public by focusing on scenario analysis of the significant downside risks now facing the world economy.