Gross global debt reached $365 trillion (€321 trillion), or 311 per cent of global gross domestic product (GDP), in the first half of 2026, according to the latest from the Institute for International Finance (IIF). Should we be worried?
The IIF thinks so, pointing out that “Mature market governments now spend more on interest expense than the world invests in either AI [artificial intelligence], defence, or energy” and “Debt has become more a political issue than a macro-financial one – creating a vicious cycle between elections and short-term quick fixes, and a long-term vulnerability as the marginal utility of higher debt diminishes.”
What is still more striking is that the IIF worries more about high-income than developing or emerging economies.
Yet the IIF also shows that between 2018 and June 2026, the rise in the ratio of global debt to output was less than 10 percentage points. That hardly sounds so bad.
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The story is striking: the ratio reached a post-Covid peak of 337 per cent in early 2021, before falling by 27 percentage points by the end of 2023. What was this magical “debt-buster”? Good old-fashioned (and supposedly “unexpected”) inflation.
This is – to put it mildly – not the first time inflation has wiped out debt. It was, to take one of countless examples, an important part of the UK’s elimination of its post-second World War debt. For countries able to print the money in which their debt is denominated, that is often what happens.
Yet inflation leaves a legacy. It is one of the reasons interest rates are now much higher than pre-Covid. Interest costs have soared for governments in mature economies: between December 2021 and the end of August 2026, these jumped by 1.5 percentage points, to reach 3.3 per cent of GDP.
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The US is a good example: as a share of GDP, interest costs rose 1.6 percentage points between January 2021 and 2026.
What is happening with the level and costs of government borrowing is central – but it is not everything. The IIF also notes the huge recent rise in issuance of AI-linked corporate bonds. It estimates that this will reach $541 billion in 2026, up from $90 billion three years before.
The associated investment boom is also a driver of the higher interest rates and so an indirect cause of the higher cost of government debt.
Remarkably, AI-related corporate debt is issued at far longer maturities than US Treasuries: in 2026 so far, the average maturity of the former reached 13.4 years (from 11.5 years in 2024) against a mere 2.5 years for US Treasuries (down from 6.1 years in 2024).
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Interest on corporate AI-related debt is also only a percentage point higher than on Treasuries. While US government borrowing is strikingly short term, other high-income governments are not far behind.
The IIF indeed seems more relaxed about private than government debt and that of emerging economies than of high-income ones. It notes, for example, that private credit, about which there is some concern, “accounts for only around 5 per cent of outstanding non-financial corporate debt”.
On the latter, it points to the record pace of sovereign Eurobond issuance in 2026, adding that “stronger fundamentals have helped”. It also stresses the health of “ESG lending”, with year-to-date lending of $1 trillion.
In sum, the IIF’s view is that the recent inflation-induced fall in debt ratios has created a “deceptively benign picture”. With structurally higher interest rates than a few years ago and governments without the will or the mandate to impose pain on voters, public debt will continue to accumulate in supposedly mature countries at a rapid rate.
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Meanwhile, the shift to shorter maturities, notably in the US, flatters to deceive. The risk is that there could be a sharp jump in these yields, with dramatic results for the cost of debt service. A possible trigger might be sharp depreciation of a vulnerable currency.
There are also political risks. War is one. Energy shocks are another. Bigger trade conflicts are yet another. It is also not hard to imagine outright internal conflict in the US or a breakdown of co-operation in the EU. If the far right were to become a dominant political force, the implicit support of, say, France by Germany, might even be in question.
My take from the IIF’s report is not that we are on the eve of disaster but that important countries are losing room for manoeuvre on an unsustainable long-run path. As the late economist Herbert Stein famously said: “If something cannot go on forever, it will stop.”
Huge accumulations of public debt cannot be justified forever, particularly when there is no crisis to justify them. But there is also a corollary to Stein’s law by the late economist Rüdiger Dornbusch, who said: “Crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.”
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His expertise was Latin America. Many must have noticed the growing similarity between that region and the US.
In emerging countries that rely on borrowing in foreign currencies, the crises Dornbusch had in mind tend to require a foreign rescue. That is not the case for countries able to borrow in their own currencies.
The latter can also play all sorts of games with their lenders, be they domestic or foreign. One is “financial repression” in which lenders are forced to accept lower interest rates or, in other ways, lend to governments on unfavourable terms. The US is powerful enough (the UK most definitely is not) even to coerce foreign lenders. But such tricks never work forever.
Dornbusch’s law still applies – it can merely take a long time to get there. Maybe even the free capital flows we are so used to will be sacrificed. But inflation is almost always the first resort. Why else does Trump want the Fed to put rates at 1 per cent? – Copyright The Financial Times Limited 2026
