Economists have warned that rising debt servicing costs will become increasingly expensive, posing significant risks to governments around the world.
Global debt rose by $10 trillion in the first half of this year to more than $365 trillion, according to a study released Wednesday by the Institute of International Finance.
Sovereign debt is rising as yields on medium- and long-term government bonds issued by many of the world’s largest economies, including the United States, Japan, France and the United Kingdom, reach their highest levels in more than a decade. The rise in yields reflects investors’ growing discomfort with rising interest rates, persistent energy cost pressures, weak economic growth and high government spending.
The IIF highlighted that the four major economies in particular face “permanently large deficits and rising interest costs, challenges that have long been associated with debt-stressed emerging market sovereigns.”
The Washington-based group found that developed countries paid more than $3.3 trillion in interest on internationally traded debt last year, more than global spending on AI ($2.6 trillion), defense ($3.1 trillion) and clean energy ($2.3 trillion).
Debt has become a political issue, creating a “vicious cycle between elections and short-term quick fixes and long-term vulnerabilities due to the diminishing marginal utility of high debt,” the IIF warned.
The report added: “Interest costs have soared as base interest rates have risen, while structural pressures from health care and public pension spending remain largely unaddressed.”
The Paris-based Organization for Economic Co-operation and Development said in its economic outlook on Wednesday that rising bond yields point to the need for further efforts to “contain and reallocate government spending, improve public sector efficiency and strengthen revenue.”
He said reforms were needed to ensure long-term debt sustainability and ensure the government was able to respond to future shocks.
Meanwhile, International Monetary Fund (IMF) chief Kristalina Georgieva criticized governments for their lack of action, saying in an interview with the BBC this week that the shock to the global economy was “raising debt levels like a stairway to heaven”.
“There are two things we need to do: lower debt levels, make fiscal consolidation a top priority, and make sure the central bank fulfills its price stability mandate,” he said.
“I cannot overstate how important it is to have the courage to take the necessary steps. These are politically difficult steps, but they are necessary.”
