IMF Warns of Skyrocketing Global Public Debt

The International Monetary Fund (IMF) has warned that global public debt levels will rise sharply this year as the trade war slows economic growth and brings further volatility to financial markets.

The IMF forecasts that global public debt (the ratio of government debt to GDP) will increase by 2.8 percentage points this year. This would bring global public debt to 95 percent of GDP.

“This upward trend is likely to continue, reaching 100 percent of GDP by the end of the decade, higher than the peak during the pandemic,” the IMF said.

During the pandemic, government debt levels were sharply increased, and much of the newly issued bonds were bought up by central banks, which created new money for this purpose. This was one of the reasons why the Western world was hit by a wave of inflation.

The IMF’s Fiscal Monitor report states that the debt burdens of most major countries are growing. These include the United States, China, Australia, Brazil, France, Germany, Indonesia, Italy, Mexico, Russia, Saudi Arabia, South Korea, and the United Kingdom. Below you can see the growth in the debt burden of the G7 countries.

While it peaked at 139 percent in 2020 and fell after the economies recovered, according to a recent forecast it will reach close to 130 percent by 2030. Back in 2001, the debt burden of the G7 countries was 75 percent of GDP.

Governments are now in a bind because debt levels have risen too high and spending cuts are needed. At the same time, growth expectations are low, which in turn creates a temptation to spend more to stimulate economies, the IMF said.

If trade tensions do not ease, debt levels could rise even faster. Countries around the world are also increasing their defense spending, which in turn puts budgets under even greater pressure. However, emerging markets are concerned about the turbulence in the US bond market, which threatens to raise their borrowing costs.

“A tighter and more volatile financial environment in the United States could have a domino effect on emerging markets and other Western countries, pushing up borrowing costs,”

the IMF economists wrote.

“This would also have a significant impact on commodity prices, putting them under pressure and causing large fluctuations.”

As countries’ budgetary situations deteriorate, further increases in interest rates carry significant risks, the report said.

Comment From Tavex Analyst

The increase in debt levels comes at a time when interest rates have moved higher and countries’ interest payments are growing at a tremendous pace. The interest payments on new debt have not been brought down by fears of an economic recession. On the contrary, the US borrowing costs have actually increased following the trade war started by US President Donald Trump. This is probably one of the main reasons why Trump partially backed down on his tariff policy. The market reacted in the opposite way to usual.

It is also very significant that the IMF highlights the turbulence in the US Treasury market in its report. These are just the first tremors in a series of events that will lead to the cracking and possibly complete collapse of the debt-based system.

Since the US dollar is the world’s reserve currency, the US bond market is the most important market that reflects the health of the current monetary system. The opposite reaction to the usual is only a prelude to larger tremors in both the bond market and the monetary system.

Key Takeaways

The IMF’s stark warning underscores a troubling trajectory for the global economy. With public debt projected to reach historic highs, governments are facing a precarious balancing act between fiscal restraint and the need to stimulate sluggish growth. The combination of rising interest payments, geopolitical tensions, and increasing defence spending is compounding fiscal pressures across advanced and emerging economies alike.

The growing instability in the US bond market, highlighted by the IMF, suggests that we may be on the cusp of a broader systemic shift. As borrowing costs rise and global confidence in debt sustainability wanes, the cracks in the current monetary system are becoming increasingly visible. For investors and policymakers, this could signal the need to reassess traditional assumptions about fiscal policy, monetary stability, and safe-haven assets.

In this context, understanding the risks of a debt-driven economic model is more important than ever. Whether these developments lead to gradual reform or a more disruptive transformation remains to be seen, but the warning signs are becoming too loud to ignore.