Governments around the world are set to borrow a record $12.3 trillion in 2025, driven by rising defense spending, economic stimulus measures, and high interest rates. According to estimates from S&P Global Ratings, global debt is expected to reach $76.9 trillion, continuing a trend that started with the 2008 financial crisis and worsened during the pandemic.
The Financial Times reports that major economies are relying on borrowing to deal with ongoing crises, but rising debt-servicing costs make this approach riskier than before. While debt was manageable when interest rates were low, today’s higher borrowing costs pose serious challenges for governments.
Higher Interest Rates Make Debt More Expensive
One of the biggest concerns is the growing cost of servicing global debt. As bond yields rise, governments must pay more to borrow money, putting pressure on national budgets. Roberto Sifon-Arevalo, global head of sovereigns at S&P, warns that while borrowing was sustainable in a low-interest environment, today’s conditions are much tougher.
Big investors are already worried. Pimco, a leading bond investment firm, recently reduced its exposure to long-term U.S. debt due to concerns about sustainability. Billionaire investor Ray Dalio has even suggested that the U.K. risks falling into a “debt death spiral,” where it must keep borrowing more just to stay afloat.
U.S. and China Lead Global Borrowing
The U.S., the world’s largest borrower, will issue $4.9 trillion in new debt. Despite large fiscal deficits and growing interest expenses, the U.S. still benefits from the dollar’s status as the world’s reserve currency, which gives it flexibility in managing its finances. However, S&P expects the U.S. fiscal deficit to stay above 6% of GDP through 2026.
China, the second-largest borrower, is expected to increase its debt issuance by over $370 billion, bringing its total borrowing to $2.1 trillion. The country is ramping up spending to revive its struggling economy, but this aggressive borrowing strategy carries risks.
A concerning trend is the decline in the credit quality of major economies. The share of global debt from top-rated AAA borrowers has shrunk since the global financial crisis, as countries like the U.S. and U.K. have lost their top-tier status. Investors are demanding higher yields on government bonds, reflecting their concerns about long-term fiscal stability.
Political Impact of Rising Global Debt
The rise in government debt is also influencing politics. Voters in many countries are turning to fiscally conservative movements that promise to rein in spending. As global debt levels grow, governments may struggle to fund infrastructure projects, social programs, and other long-term investments.
S&P suggests that while there is enough investor demand to absorb the new debt, the real challenge is managing the cost. If debt continues to rise unchecked, governments will face tough choices in balancing economic growth with fiscal responsibility.
The world’s growing debt burden is a sign of deeper economic struggles. Governments are borrowing more to deal with crises, but rising interest rates make this strategy increasingly difficult. While investors still see government bonds as a safe bet, the long-term sustainability of this debt remains uncertain. If borrowing costs keep rising, many countries may be forced to make difficult economic and political decisions in the years ahead.
