When the Institute of International Finance published its Global Debt Monitor for March 2025, it revealed a stunning figure—$315 trillion, or 336% of world GDP, the highest level in history. The situation is that even as rampant inflation subsided and economic growth stabilized, debt levels refused to follow suit. Moreover, the world economy finds itself in an unprecedented situation when it comes to debt, with both advanced and emerging economies having accrued significantly more obligations in the form of loans and bonds.
Debt growth has occurred in both developed and developing economies as governments have borrowed extensively to finance pandemic relief, transition to a Green economy, and support citizens' finances, and businesses have taken advantage of low-interest rates to go into debt. Consequently, as interest rates remain high, the burden of debt service will affect many nations' fiscal policy decisions.
The Pandemic Legacy and Policy Overhang
The debt growth in the years 2020-2022 was driven by pandemic-related government expenditures, which totaled over $17 trillion worldwide. Such a fiscal response was made possible by the extremely low-interest rates, which allowed governments to finance pandemic-related expenditures by issuing bonds. However, as inflation grew in 2023-2024, many governments were confronted with the necessity to spend more on interest on their debt. Thus, the US, EU countries, Japan, and China, whose combined debt as a percentage of GDP comprises the largest portion, currently have to allocate a significant amount of new expenditures to interest payments on their debt.
According to the IMF statistics, interest payments as a share of GDP have doubled in most advanced economies since 2019. The interest on the US debt for 2024 is estimated at over 1.1 trillion USD, which is more than defense spending for the year. For the EU, the figure stands at over 600 billion EUR, and there is growing pressure on governments to impose austerity measures in spite of the recent wave of fiscal populism.
United States: Debt Meets Industrial Ambition
As the largest global economy, the US carries the largest debt by far, which amounted to 34 trillion USD, or 122% of GDP, at the beginning of 2025. The major portion of the recent increase in the US debt was done through the issuance of bonds and notes. The motivations for the growth in debt include not only pandemic-related expenditures but also industrialization policies, such as the Inflation Reduction Act and the CHIPS Act, and growing defense expenditures, which have caused the federal deficit to grow to over 6% of GDP.
Consequently, there has been a significant increase in the issuance of Treasuries, which has created supply-demand pressures in spite of the ongoing dollar dominance in international finance. Given that the Federal Reserve, the country's largest buyer of bonds, has stopped purchasing them, the responsibility of absorbing the bond issuance lies with private investors. As a result, the yield curve has to move higher to offset the risk of supplying more bonds, which puts additional pressure on the government's expenditures.
Europe's Balancing Act
Debt growth in Europe is driven by several similar factors, but the region's largest creditor nation Germany faces the most challenges due to its status as an economic powerhouse and the corresponding obligations to promote fiscal responsibility. As a result of the de facto relaxation of the EU fiscal rules in 2024, Germany was forced to commit to specific fiscal policies aimed at reducing the deficit in the future. In the meantime, Germany's own industrial subsidy policy caused concerns among German and European officials about the sustainability of its current path.
The partial tightening of monetary policy by the European Central Bank created additional pressures on the European economy. In particular, weaker economies within the EU, such as Italy and Spain, had to rely more on the EU's recovery fund to finance their continued fiscal expansion or tighten their budgets. Across the EU, concerns grew about a possible debt crisis, especially in light of tightening monetary policy.
Emerging Markets: Debt and Currency Pressures
Emerging markets account for approximately a third of global debt growth since 2020, as many nations borrowed heavily in foreign currency to finance their economic growth and transition to a Green economy. Such a strategy is now coming at a price as higher interest rates and a stronger dollar put additional pressure on emerging markets' ability to finance their debt service. However, in many such countries, the domestic currency accounts for the majority of issued bonds, and some even have significant reserves of foreign currency, allowing them to avoid downward adjustments of their exchange rates.
Still, several nations, including Egypt and Argentina, had to seek assistance from the IMF after foreign investors lost confidence in their abilities to make payments on their external debt. In addition, the service of external debt for many developing countries in Africa has reached a peak in two decades, reigniting the debate on the necessity to reform the global financial system for fairness and flexibility. As a result, the need to pursue such reforms, which would allow developing countries to restructure their sovereign debt, became a pressing issue that continued to occupy the attention of policymakers throughout 2025. The G20 Common Framework for Debt Relief is seen by many as a potential solution to the imminent crisis.
The Corporate Overhang
In addition to the growing debt of governments, corporate debt also presents a challenge, as corporations took advantage of the opportunities to borrow money at low rates and invested in various industries. However, with the increase in interest rates, companies now face the prospect of having to pay off large amounts of debt, which creates a significant burden on the global corporate sector. Analysts estimate that $8 trillion in corporate bonds will mature in 2026.
In the US, while investment-grade bonds have low spreads, many junk bonds have defaulted, with the number of defaults being twice as high as in the pre-pandemic period. In China, mortgage developers continue to default on overseas bonds, and in Europe, companies deal with both higher input prices and stricter regulations, forcing them to pursue merger and acquisition strategies to improve efficiency.