The world is facing an unprecedented debt problem. Global debt has climbed to $338 trillion, the highest level ever recorded, according to the Institute of International Finance (IIF). In just six months, debt rose by more than $21 trillion, a pace last seen during the peak of the COVID-19 pandemic. This sharp rise is raising serious concerns about financial stability and how sustainable government spending really is.
Why Global Debt Is Rising So Fast
Several factors are driving this surge. Easier financial conditions, a weaker US dollar, and supportive central bank policies have made borrowing more attractive. Major economies such as the US, China, Japan, France, Germany, and the UK recorded the largest increases in debt. While currency movements explain part of the rise, the bigger issue is that many governments are continuing to borrow heavily even without a major global crisis like the pandemic.
Emerging Markets Under Pressure
Emerging markets are feeling the strain the most. Their total debt has crossed $109 trillion, and debt relative to economic output is at a record high. The biggest challenge ahead is refinancing: nearly $3.2 trillion in bonds and loans are due to mature in the rest of 2025.
This is already causing stress. In April 2025, Angola faced a sharp bond sell-off that pushed borrowing costs close to 15%, effectively locking the country out of global markets. Similar risks are building across other developing economies, especially those with debt tied to the US dollar.
The Return of “Bond Vigilantes”
Investors are once again punishing governments they believe are overspending. These so-called bond vigilantes sell government bonds, pushing yields higher and making borrowing more expensive. Bond market liquidity is now at its weakest since the eurozone debt crisis, and long-term yields in major economies are at multi-year highs.
In the U.S., 30-year Treasury yields have crossed 5%, levels not seen since before the 2008 financial crisis. Japan and parts of Europe are also seeing rising yields and reduced bond market liquidity.
Central Banks in a Tight Spot
High debt is limiting what central banks can do. Many governments are relying more on short-term borrowing, which makes them vulnerable to interest rate changes. This increases political pressure on central banks to keep rates low, even when inflation risks remain.
If central banks raise rates, debt servicing costs jump. If they keep rates low, inflation risks and currency weakness increase. This balancing act is becoming harder as debt levels climb.
A Fragile Global Financial System
Since the 2008 crisis, banks and investors have shifted more money into government bonds instead of private lending. This has increased the risk of a “sovereign-bank loop”, where problems in government finances quickly spill over into the banking system.
Global fiscal deficits remain high, averaging around 5% of GDP, long after most economies recovered from recession. Public debt alone now accounts for almost 93% of global GDP.
Regional Differences, Shared Risks
Debt pressures vary by region. Some countries have managed to reduce debt ratios, while others, such as Canada, China, and Saudi Arabia, have seen sharp increases. Emerging markets with large dollar-denominated debt are especially vulnerable when global conditions tighten or the dollar strengthens. Past crises in Sri Lanka and Pakistan show how quickly rising debt costs and currency pressure can push countries out of global markets.
Inflation, Growth, and Tough Policy Choices
Rising debt means higher interest payments, leaving less money for infrastructure, healthcare, and climate adaptation. Many developing countries are already spending a large share of export earnings just to service debt. Policymakers face a dilemma: fight inflation and risk worsening debt problems, or support growth and risk higher inflation and weaker currencies.
What Comes Next
Global public debt is expected to approach 100% of world GDP by 2030, raising serious long-term sustainability questions. Ageing populations, climate costs, and infrastructure needs will only add more pressure.
Experts agree that solutions will require global coordination, better debt restructuring systems, and more support for developing economies. Without reform, the risk of a larger financial crisis grows. The $3.2 trillion in emerging market debt coming due in 2025 will be a key test. How governments, investors, and central banks respond may decide whether this debt burden remains manageable or turns into the next global crisis.
In short, the $338 trillion debt mountain is no longer just a number. It is shaping markets, policy decisions, and the future path of the global economy.
