Global Debt Surges, Raising Fears of a New Debt Crisis

The world is grappling with a relentless rise in debt, a situation likened to an addiction from which it cannot break free. Following massive government spending in 2020 to combat the COVID-19 pandemic, global debt surged. While industrialized nations saw debt-to-GDP ratios decrease due to strong post-pandemic economic recovery, this boom has ended, and borrowing continues unabated.

Recently, the United States surpassed the psychological threshold of $40 trillion in absolute debt. The question looms: is a global debt crisis imminent? A sovereign debt crisis occurs when states lose the confidence of capital markets, raising doubts about their ability to repay debts. Holger Bonin, head of the Institute for Advanced Studies (IHS), explains that high debt and deficits become problematic when confidence erodes that governments will manage their finances responsibly.

"High debt and large deficits only become a problem when confidence dwindles that politics will prevent the state budget from running wild," Bonin stated. "If everyone knows, for example, that the pension system is not sustainable in the long run, but no reforms are initiated, market confidence wanes." Evidence of this waning confidence is seen in the noticeable rise of yields on global bond markets.

In the U.S., the world's most critical bond market, yields on 30-year bonds exceeded 5.3%, reaching their highest level since 2007. Ten-year bond yields climbed to their highest point since early 2025. Similar trends are observed globally: 30-year French government bonds briefly yielded as much as they had not since 2008, while German 10-year bond yields hit their highest since 2011. Austrian 30-year bonds offered around four percent, a level not seen in 15 years, and Japanese 10-year yields are at three-decade highs.

This increased cost of borrowing impacts most countries, diverting more state revenue to debt servicing and shrinking room for essential investments and social programs. For nations with substantial debt burdens, rising interest rates can quickly transform a financing problem into a full-blown debt crisis, especially amid sluggish economic growth. Wifo chief Gabriel Felbermayr recently warned that the risk of a major global sovereign debt crisis is currently very high.

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High debt and large deficits only become a problem when confidence dwindles that politics will prevent the state budget from running wild. If everyone knows, for example, that the pension system is not sustainable in the long run, but no reforms are initiated, market confidence wanes.