Global spending on interest payments on government debt has reached a historic high of $1.5 trillion. For example, in the U.S., spending on debt support has exceeded spending on national defense and health care programs.
The high level of debt to GDP continues to weigh on European countries as well. According to Eurostat summaries, the largest debtors among EU countries are Greece, Italy and France, whose debt service burden is getting heavier due to the pan-European monetary restrictions.
Re-lending at high rates
As central banks raise key interest rates, governments are forced to refinance old liabilities at higher interest rates. Organization for Economic Cooperation and Development (OECD) reports note that high sovereign borrowing costs hit budgets, reducing opportunities for social spending and investment.
In the U.S., sovereign debt has exceeded $36 trillion, about 124% of GDP. With bond yields above 5%, the cost of servicing this debt becomes the largest item in the federal budget, exceeding national defense spending. The Congressional Budget Office estimates that interest payments could eat up as much as 16% of all tax revenues in 2026. Global spending on interest payments on government debt has reached an all-time high of $1.5 trillion. For example, in the United States, the cost of maintaining debt has exceeded spending on national defense and health care programs.
In Europe, the situation is complicated by the fragmentation of the debt market. The “southern flank” countries are traditionally in the risk zone. Italy’s debt is 142% of GDP, France’s – 112%. The growth of French bond yields above 4.3% creates the strongest pressure on the country’s budget, which is already in deficit of 5.5% of GDP. The spread (yield differential) between French and German securities widened to 95 basis points, signaling a loss of confidence in Paris’ fiscal sustainability.
Japan represents an extreme case of a debt trap. With debt above 260% of GDP, even a minimal rise in 10-year bond yields above 1.5% forces the Bank of Japan to choose between bankruptcy and losing control of the yen. The currency is already trading at levels of 162-165 per dollar, making it too expensive to import critically needed energy resources. To top it all off, a higher refinancing rate will also lead to an epic repatriation of capital to Japan, which could trigger a new global financial crisis.
