Autor: Nermin Sefić
Global public debt has reached levels that would have been unimaginable outside wartime two decades ago. The combination of the 2008 financial crisis, the pandemic, the energy crisis, and a prolonged…
Global public debt has reached levels that would have been unimaginable outside wartime two decades ago. The combination of the 2008 financial crisis, the pandemic, the energy crisis, and a prolonged period of low interest rates created an environment in which governments worldwide accumulated debt at scales that now raise fundamental questions about long-term fiscal sustainability, the role of central banks, and the very architecture of the global financial system.
The period after 2008 was characterized by an unusual combination of circumstances that allowed governments to borrow at scales that would have caused serious market concern in prior decades. Central banks, facing deflation risk and slow economic growth, pursued policies of persistently low, often near-zero or even negative interest rates, alongside massive quantitative easing programs that effectively created additional demand for government bonds.
This combination created an environment where governments could borrow at historically low debt-servicing costs, making fiscal expansion considerably cheaper than it would otherwise be. Political incentives to use that cheap capital for financing additional spending, rather than reducing existing debt, proved stronger than fiscal discipline in nearly every major economy, regardless of the political orientation of leading parties.
The pandemic further accelerated this trend, forcing governments into unprecedented levels of fiscal support for economies paralyzed by lockdowns, while tax revenues simultaneously fell due to the economic slowdown. This combination of increased spending and reduced revenue further widened fiscal deficits to scales not seen outside major wars.
The period of low interest rates abruptly ended with the return of inflation that followed the pandemic, partly driven by supply chain disruptions and partly by the massive fiscal and monetary stimulus injected into the economy during the pandemic. Central banks worldwide were forced to sharply raise interest rates to curb inflation, dramatically changing the fiscal landscape for all governments that had accumulated significant debt during the prior decade of cheap money.
This shift in the interest rate environment creates what economists call a "refinancing problem" — debt issued at low interest rates during the prior decade gradually matures and must be refinanced at significantly higher, current market rates, substantially increasing debt-servicing costs for governments that hadn't significantly reduced total debt levels during the cheap-money period.
While rising global debt is a common trend, actual fiscal risk varies significantly depending on several key factors — the currency in which debt is issued, debt maturity, the structure of the investor base holding that debt, and the underlying strength of economic growth that determines the ability to service debt over time.
Countries that issue debt in their own currency, like the United States, Japan, or eurozone countries, have significantly more flexibility in managing debt than developing countries forced to issue debt in foreign currencies, usually US dollars, due to limited international investor confidence in their domestic currencies. This difference becomes critical during periods of dollar strengthening, when countries with dollar-denominated debt face rising real debt-servicing costs even if their domestic economic situation hasn't changed.
Japan represents a special case worth more detailed analysis — despite a debt-to-GDP ratio that significantly exceeds nearly every other developed economy, Japanese debt remains relatively stable thanks to a combination of country-specific factors: the vast majority of debt is held domestically, within the Japanese financial system, rather than by foreign investors sensitive to changing risk perceptions; a long-standing culture of savings among Japanese households creates a stable domestic base of demand for government bonds; and the Bank of Japan retains significant flexibility in managing interest rates due to the specifics of domestic inflation dynamics.
Theoretically, the solution to excessive debt is relatively simple — a combination of spending cuts, revenue increases, and maintaining economic growth that exceeds debt growth over time. In practice, each of these elements carries significant political costs that make actual fiscal consolidation extremely difficult to implement in democratic systems with regular electoral cycles.
Reducing public spending inevitably hits specific voter groups dependent on programs being cut, creating concentrated, visible losers with strong incentive for political resistance, while the benefit of long-term fiscal stability remains diffuse, abstract, and hard for an individual voter to see in the short term. This asymmetry between concentrated costs and diffuse benefits represents the fundamental political challenge of fiscal consolidation in nearly every democratic system.
Increasing tax revenue carries similar political challenges, with the additional risk that excessive taxation can slow economic growth that is itself crucial for long-term fiscal sustainability, creating a potentially counterproductive cycle where attempts to reduce debt through higher taxes slow the growth that would otherwise help reduce the debt-to-GDP ratio.
Central banks find themselves in an increasingly complex position of balancing between two potentially conflicting goals — controlling inflation through interest rates and maintaining fiscal sustainability for governments that finance part of their debt through markets directly affected by monetary policy. This tension, known as "fiscal dominance," arises when the level of public debt becomes so large that the central bank must factor fiscal implications into its interest-rate decisions, potentially compromising its ability to conduct monetary policy based solely on the price-stability goal.
Concern about fiscal dominance is particularly pronounced in contexts where a central bank operates under direct or indirect political pressure to maintain low interest rates to ease government debt servicing, even when inflation targets would call for higher rates. This dynamic poses a serious risk to the long-term credibility of monetary policy, as markets perceiving a central bank as subject to fiscal pressure rather than an independent inflation-control mandate may demand higher risk premiums on government debt, further worsening the very fiscal problem the pressure on the central bank was trying to alleviate.
The United States occupies a unique position in global debt dynamics thanks to the dollar's status as the world's dominant reserve currency — a status creating persistent, structural global demand for US government bonds regardless of the country's current fiscal policy. This "exorbitant privilege," as known in economic literature, allows the United States to borrow at lower costs than would otherwise be possible, and provides considerably more fiscal room to maneuver during crises than countries without comparable currency reserve status have.
Still, this privilege isn't unlimited or guaranteed forever. Growing concern about the long-term US fiscal trajectory, combined with gradual diversification of some countries' foreign-exchange reserves away from exclusive dollar dependence, creates a long-term risk of gradual erosion of this privilege, though most analysts consider a sudden loss of dollar reserve status an unlikely scenario in the medium term, given the lack of a credible alternative comparable in depth and liquidity to the American government bond market.
The eurozone carries a unique structural challenge within the broader global debt story — a combination of common monetary policy conducted by the European Central Bank for all member countries, alongside retained national fiscal policies remaining under individual governments' jurisdiction. This asymmetry between centralized monetary and decentralized fiscal policy creates a structural vulnerability that became dramatically visible during the European debt crisis of the prior decade, when countries like Greece facing unsustainable debt couldn't simply devalue their own currency to ease the debt burden, an option available to countries with independent monetary policy.
Reforms introduced after that crisis, including mechanisms for financial assistance to countries in fiscal difficulty and enhanced oversight of national budgets at the European Union level, partly strengthened eurozone resilience, but the fundamental tension between monetary union and fiscal fragmentation remains unresolved, making the eurozone structurally more vulnerable to future debt crises than countries with fully aligned monetary and fiscal sovereignty.
Japan records a public debt-to-GDP ratio of 236.7% in 2024, according to Japan's Ministry of Finance data — by far the highest ratio among developed economies, and a level sustained for decades without the dramatic debt crisis traditional economic models would predict at such debt levels. Research by economists Yili Chien, Wenxin Du, and Hanno Lustig, published in the Journal of Economic Perspectives in late 2025, offers a compelling explanation for this seemingly paradoxical stability — Japanese households hold half their wealth in low-yield bank deposits (only 23% own stocks, bonds, or mutual funds, compared to over 60% of American households), providing the government an abundant and cheap funding source. Japan's government then invests that cheaply borrowed capital in stocks and foreign assets — by 2024, the Japanese government held domestic stock worth 42% of GDP and foreign investments (mostly US stocks) worth an additional 62% of GDP, effectively functioning as a kind of sovereign wealth fund financed with borrowed money, reducing "net" debt to only about 77% of GDP when that asset holding is factored in.
The United States, with a debt ratio of 124.3% of GDP in 2024, faces a different risk dynamic. According to Tokyo Foundation analysis, US government interest payments exceeded defense spending during 2024 and are projected to reach $1 trillion, or 3.3% of GDP, by 2026. This rapidly growing interest burden is directly linked to the combination of large absolute debt and the sharp rise in interest rates after 2022, creating structural fiscal pressure that Japan, thanks to its specific debt-financing structure through low-yield domestic households, hasn't experienced to the same degree.
Sri Lanka offers the most concrete, recent example of how abstract fiscal unsustainability turns into a real, dramatic national collapse. The country announced suspension of payment on most external debt on April 12, 2022 — its first sovereign default in history, despite a previously unblemished debt-repayment record even through earlier, milder currency crises. The debt-to-GDP ratio rose to 126% in 2022, driven by a combination of long-standing fiscal deficits, import-substitution trade policy that eroded the country's ability to generate foreign exchange needed for repayment, and, according to Asian Development Bank analysis, poor governance that made the crisis a years-long, gradual process rather than a sudden external shock.
The consequences were drastic and directly visible in citizens' daily lives: the Sri Lankan rupee depreciated approximately 55% on an annualized basis, falling from 200.92 to the dollar in February to over 360 to the dollar by April 2022, while foreign reserves fell to just $1.9 billion by end-March — a significant portion of which was hard to actually use due to conditions tied to a Chinese swap arrangement. Fuel, electricity, and medicine shortages caused mass protests culminating in the president fleeing the country in July 2022. According to the United Nations, Sri Lanka wasn't alone in its crisis — 54 countries were under debt stress during 2022, as the world recovered from the pandemic amid simultaneously rising interest rates.
The debt restructuring that followed proved extremely complex precisely because of creditor diversity — Sri Lanka wasn't eligible for the G20 Common Framework for Debt Treatment, forcing it to coordinate with an unusually diverse creditor landscape outside the traditional Paris Club, with domestic borrowing playing a significant role in overall debt structure. While the crisis is sometimes mistakenly attributed solely to a "Chinese debt trap," analysis published in the SAIS Review of International Affairs suggests international bonds played a considerably larger role in the crisis's origin than Chinese debt itself — a nuance often lost in simplified geopolitical narratives about this case.
Alongside traditional developed-economy debt dynamics, a distinct dimension of the global debt story over the past decade concerns China's transformation from the largest single new financier of developing countries into their largest debt collector. Through the Belt and Road Initiative (BRI), Beijing disbursed over a trillion dollars in loans to more than 150 countries to build roads, ports, railways, and telecommunications infrastructure from 2013 onward.
According to a May 2025 report by Australia's Lowy Institute, the dynamic has dramatically reversed — developing countries owe a record $35 billion in debt repayments to China during 2025, while new Chinese loan commitments have stagnated at around just $7 billion annually since the pandemic ended, a level unseen since the late 2000s and just a quarter of the amount typical during BRI's 2010s boom. The result is that China's net flow to developing countries fell to negative $34 billion in 2024 — China now receives more in repayments than it disburses in new loans, a transition that happened surprisingly fast: in 2012, China was a net financier for only 18 developing countries; by 2023, that number had risen to 60 countries where China now nets a capital drain.
Two-thirds of the total $35 billion in 2025 repayments (about $22 billion) will be paid by 75 of the world's poorest and most vulnerable countries, according to the Lowy Institute report, directly threatening budgets for healthcare, education, and climate adaptation. A separate study by researchers from the World Bank, Harvard Kennedy School, and the Kiel Institute, published in 2023, reveals China simultaneously became a major emergency lender of last resort — spending $240 billion between 2008 and 2021 bailing out 22 countries struggling with BRI debt repayment, including Argentina, Pakistan, Kenya, and Turkey, at an average interest rate of roughly 5% — more than double the IMF's standard 2% rate.
Ten years after BRI's launch, according to a Wilson Center report, as much as 80% of Chinese government loans to developing countries went precisely to countries already in or becoming debt distress — a statistic critics cite as evidence of deliberate "debt trap" strategy, while Chinese officials and some academics, like Deborah Brautigam of Johns Hopkins University, argue Chinese lending is driven more by commercial logic than deliberate geopolitical leverage.
The global problem of excessive public debt has no simple, painless solution. The combination of demographic changes increasing pension and healthcare system costs, geopolitical tensions requiring increased defense spending, and political incentives favoring short-term spending over long-term fiscal discipline creates an environment where managing public debt will remain a central topic of global economic policy over the next decade, without a clear, painless path to a solution that doesn't require significant political and economic trade-offs.
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Autor i urednička odgovornost: Nermin Sefić. Izdavač: GNK ASG d.o.o..
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