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Global government borrowing is expected to reach a record $12.3tn this year, as a rise in defence and other spending by major economies and higher interest rates combine to push up debt levels.
The 3 per cent rise in sovereign bond issuance across 138 countries would take the total debt stock — which has been pushed higher by the global financial crisis, the coronavirus pandemic and now the need for greater European defence spending — to a record $76.9tn, according to estimates by S&P Global Ratings.
Big economies’ focus on fiscal policy to “deal with crisis after crisis continues, and the outcome is you do have a much more indebted sovereign picture”, said Roberto Sifon-Arevalo, global head of sovereigns at S&P.
This had been compounded, he added, by a rise in debt-servicing costs, as bond yields have moved substantially higher since the end of central banks’ bond-buying programmes.
Borrowing to fund higher spending “was fine and sustainable while you had the borrowing costs that you had before the pandemic, now it presents a much bigger problem”, Sifon-Arevalo said.
Worsening public finances are a growing concern among big investors, with bond giant Pimco warning in December that it planned to cut its exposure to long-dated US debt due in part to “debt sustainability questions”. Billionaire investor Ray Dalio has warned that the UK has risked entering a “debt death spiral” where it needs to borrow more and more in a self-fulfilling bond sell-off.
In the US, the world’s largest borrower, “wide fiscal deficits, high interest spending and substantial debt refinancing requirements” would push long-term issuance to $4.9tn, said S&P, whose figures exclude short-term Treasury bills and other forms of public borrowing, such as local government debt.
The agency expects the American government’s fiscal deficit will remain above 6 per cent of GDP by 2026, but it argues the dollar’s status as the world’s de facto reserve currency will continue to afford the US “significant flexibility” in its public finances.
China, the world’s second-largest borrower, is expected to boost its long-term issuance by the equivalent of more than $370bn to $2.1tn as it spends big to try and revive its domestic economy. Outside of the G7 countries and China, borrowing across the rest of the world is expected to remain broadly flat.
Overall, the stock of debt will reach 70.2 per cent of global GDP, according to S&P. This has risen steadily since 2022 but is below the 73.8 per cent hit during 2020, when governments responded to the pandemic with huge spending programmes.
S&P also highlighted a substantial deterioration in credit quality since the global financial crisis for a number of large economies. The share of the debt stock coming from borrowers with its top AAA rating has shrunk as countries such as the US and UK have fallen out of the top bracket.
The recent rise in the supply of government debt was combining with investors’ worries about the economic outlook to create “steeper yields and renewed investor concerns about weak fiscal positions in many advanced economies”, S&P said.
Sifon-Arevalo said there was investor appetite to absorb the debt issuance, as bond funds’ assets under management had grown. But the cost of servicing the rising debt burdens would hit governments’ other ambitions, such as infrastructure spending, he added. This was feeding “changes in the political colours” around the world.
“The growth of more fiscally conservative [political] movements is not unrelated to the fact that you have seen this massive growth in fiscal deficits and debt,” he said.
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