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- Governments are trapped in a “vicious cycle” as large deficits meet rising interest expenses but are not met by political will to tackle the situation, the Institute of International Finance has warned.
- The U.S., Japan, France and U.K. are facing the challenges typically met by emerging markets, while interest payments by advanced economies have topped global spending on AI, defense or clean technology.
- International Monetary Fund (IMF) chief Kristalina Georgieva said it is “impossible to stress strongly enough how critical it is” to bring down debt and prioritize fiscal consolidation.
watch nowVIDEO02:28Ticking debt time bomb: Global debt hits record $365 trillionSquawk Box Europe
Ever-higher costs to service mounting debt loads pose a major risk to governments around the world, economists have warned.
Global debt rose by $10 trillion in the first half of the year to top $365 trillion, according to research published by the Institute of International Finance on Wednesday.
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State debts are rising as yields on medium- and long-term government bonds issued by a slew of the world’s biggest economies hit their highest levels in more than a decade — including in the U.S., Japan, France and the U.K. Rising yields reflect growing investor discomfort at rising interest rates, persistent energy cost pressures, tepid economic growth and high fiscal spending.
The IIF highlighted the four major economies in particular as facing “persistently large deficits and rising interest expenses — challenges long associated with debt-distressed emerging market sovereigns.”
The Washington-based group found that advanced economies paid over $3.3 trillion in interest on internationally traded government bonds last year, more than global spending on AI ($2.6 trillion), defense ($3.1 trillion), or clean energy ($2.3 trillion).
Debt has become a political issue, creating a “vicious cycle between elections and short-term quick fixes, and a long-term vulnerability as the marginal utility of higher debt diminishes,” the IIF warned.
“As benchmark rates rise, interest expense is set to surge, while structural pressures from healthcare and public pension spending remain largely unaddressed,” it added.
In its economic outlook published Wednesday, the Paris-based Organisation for Economic Co-operation and Development said that rising bond yields showed the need for greater efforts to “contain and reallocate government spending, improve public sector efficiency and strengthen revenues.”
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Reforms are needed to ensure longer‑term debt sustainability and ensure governments can react to future shocks, it said.
International Monetary Fund (IMF) chief Kristalina Georgieva meanwhile told the BBC in an interview this week that shocks to the global economy were “pushing debt levels up like a staircase not to heaven,” as she criticized a lack of government action.
“There are these two things that must be done: bring debt levels down, put fiscal consolidation as a priority, and make sure that the central banks deliver on their mandate for price stability,” she said.
“It is impossible to stress strongly enough how critical it is to get the courage to take the steps that are necessary. These are politically tough steps to take, but necessary steps to take.”
