The world’s debt burden has exceeded $100 trillion, and interest payments on it now exceed countries’ defense spending, the Organisation for Economic Cooperation and Development (OECD) announced in its new report Global Debt 2025 .
While interest costs in the world’s countries were at a 20-year low in 2021, they rose to a 20-year high in 2024. In total, OECD member states spent 3.3 percent of GDP on interest payments – a smaller percentage of this went to defense spending, the report shows.
Although central bankers are now lowering interest rates, countries still have to borrow at much higher rates than they did a few years ago. This also means that old debts that are now maturing are being refinanced at higher rates. Interest costs are likely to continue to rise.
The rise in interest costs comes at a time when governments are increasing their spending. The German parliament recently approved a massive package that will spend hundreds of billions of dollars on infrastructure and the military. In addition, the European Commission has relaxed budget rules on defense spending, which is also expected to increase debt burdens by hundreds of billions of euros.
Countries Need to Borrow Even More
In addition, the cost of the green revolution is growing and the European population is aging, which is putting social systems under severe pressure.
“The combination of higher costs and rising debt-related risks threatens to constrain future borrowing, at a time when these loans are needed more than ever,” the OECD wrote in its annual debt report.
Despite the sharp increase in interest costs, they remain below market rates in more than half of OECD countries. This means that in most countries, base rates are higher than what the government has to pay on its entire debt burden.
Interest costs have risen the most in developing countries, whose budgets are now under extreme pressure. The situation will get even worse in the coming years, with half of their debt maturing in the next three years and 20 percent this year, the OECD said.
What Matters is How the Loans Are Used
As borrowing becomes increasingly expensive, governments and companies need to ensure that borrowing supports long-term growth and productivity improvements in their economies, said Serdar Celik, OECD’s Head of Capital Markets.
“If they do that, we’re not worried. But if they just increase the debt burden and don’t improve the productivity of the economy, we’re looking at tougher times ahead,”
Celik explained.
Companies have been using loans for financial purposes since 2008 – for example, to refinance debt or make distributions to shareholders. Corporate investment has declined since that period. This shows that the private sector has not used loans as productively over the past 15 years.
The report shows that the rising cost of dollar-denominated loans is also a problem for emerging markets
While the average interest rate on dollar-denominated loans was 4 percent in 2020, it had already increased to 6 percent last year. In countries with a poorer credit rating, it even reached 8 percent. These countries often have a shortage of money because there is little savings and the country’s capital markets are not sufficiently developed. If the dollar strengthens, these countries will come under additional pressure.
Geopolitical Tensions
The OECD report says that achieving carbon neutrality through investment is a “tremendous” challenge
Excluding China, emerging markets, for example, are $10 trillion short of the investment needed to meet the Paris climate agreement at the current pace.
If additional investments are financed with loans, the ratio of public debt to GDP in advanced economies could increase by 25 percentage points by 2050, and in China by 41 percentage points. If the main financier is the private sector, the debt burden of energy companies in emerging markets would have to triple.
Key Takeaways
The OECD’s latest report paints a sobering picture of the global debt landscape, highlighting how interest payments have now surpassed defense spending in many countries – a signal of growing financial strain.
While governments continue to ramp up borrowing to fund critical areas such as infrastructure, military, and the green transition, the rising cost of debt poses significant risks, particularly for developing economies.
As borrowing becomes more expensive and debt burdens heavier, the key challenge will be ensuring that loans are used productively to stimulate sustainable econimic growth and long-term resilience.
Without strategic investment, both public and private sectors may find themselves facing even greater financial vulnerabilities in the years ahead.
