Global Debt Reaches $100 Trillion, Warns OECD
(LONDON) - The OECD reported this Thursday that government and corporate bonds in circulation surpassed $100 trillion worldwide last year. This rise in interest costs has forced borrowers to make difficult decisions, compelling them to prioritize investments that genuinely enhance productivity. Between 2021 and 2024, the ratio of interest costs to output has grown to levels not seen in two decades.
Geopolitical Tension
Interest payments by governments have reached 3.3% of GDP in OECD member countries, even surpassing defense spending. Although central banks are beginning to lower interest rates, borrowing costs remain significantly higher than they were before the increases in 2022, meaning that low-interest debt is being replaced, and costs are expected to continue rising. This is occurring just as governments face large expenditures; for instance, the German Parliament approved a substantial plan to boost infrastructure and increase defense spending in Europe. The long-term costs of the green transition and an aging population pose major challenges for leading economies. According to the OECD, "the combination of higher costs and more debt could limit future borrowing capacity when investment needs are more urgent than ever." While interest costs have risen, they are still lower than market rates in more than half of OECD countries and nearly a third of public debt in emerging markets. Furthermore, nearly half of the public debt in these nations and a third of corporate debt is set to mature in 2027. Low-income countries and those with high risk are facing serious refinancing challenges, with over half of their debt maturing in the next three years and 20% due this year, according to the organization. With rising debt costs, both governments and companies must ensure that their loans promote economic growth and long-term productivity, stated Serdar Celik, head of capital markets and financial institutions at the OECD. "If managed this way, there is no concern... But if more debt is piled on, and it’s costly, without increasing the productive capacity of the economy, tough times are around the corner." Meanwhile, corporations have increased their borrowing since 2008 for financial reasons like refinancing or shareholder payments, even as business investment has been declining. The OECD notes that emerging markets reliant on foreign currency loans need to develop their local capital markets. The report indicates that the costs of dollar-denominated bond loans have risen from about 4% in 2020 to over 6% in 2024, reaching more than 8% in riskier economies. Countries have struggled to access domestic funding due to low savings levels and the superficial nature of internal markets. According to the OECD, financing the transition to net-zero emissions is a "huge challenge." With the current rate of investment, emerging markets, excluding China, would face a $10 trillion shortfall to meet the Paris climate agreement goals by 2050. If these investments are made through public funds, the debt-to-GDP ratio could increase by 25 points in advanced economies and 41 points in China by 2050. If financed through private capital, the debt of energy companies in emerging markets outside of China would need to quadruple by 2035. Central banks, by reducing their bond holdings, have been replaced by foreign investors and households, which now hold 34% and 11% of the internal public debt in OECD countries, respectively. However, the OECD warned that these dynamics could change. The increase in geopolitical tensions and trade uncertainties could lead to rapid shifts in risk aversion, affecting international investment flows.
It is crucial that both governments and companies act responsibly in managing their debt, focusing on investments that generate growth. In times of financial uncertainty, prioritizing investment in infrastructure and sectors that stimulate the economy will be key to mitigating risks and ensuring long-term sustainability in the global economy.
