Debt-to-GDP Ratios

In case you missed it, the latest World Economic Prospect released by the WB last week included a specific Chapter on Sovereign Debt levels and interest rates in emerging market and developing countries (EMDEs). It provides compelling evidence on the impact of rising government debt in the developing world:   1. The relationship between debt levels and interest rates is non-linear:   The higher the debt-to-GDP ratio, the higher interest rates. Experts explain “For example, when debt is about 45 percent of GDP, a 1 percentage point increase in the debt-to-GDP ratio is associated with an 8 basis point rise in sovereign spreads; when debt is about 80 percent of GDP, the same increase adds about 26 basis points”.   2. Debt level matters:   “Between 2010 and 2024, median EMDE debt rose by 20 percentage points of GDP. Based on the model estimates, this added 114 basis points to sovereign spreads and 31 basis points to domestic-currency yields”. Yet, the report clarifies “However, these effects were largely offset by other factors, including a more accommodative tone of global financial markets”. Equally important, sovereign spreads appear considerably more sensitive to debt levels than domestic yields.   3. Rising debt in advanced economies has added further to the upward pressure on EMDE interest rates.   “Between 2010 and 2024, advanced economy government debt increased by an average of about 12 percentage points of GDP. Accounting for the rise in domestic EMDE government debt and advanced economy debt on foreign-currency and domestic-currency bond yields implies a total rise in yields of 149 and 40 basis points, respectively”. That is to say, the impact is higher that the level of domestic debt-to-GDP and adds on top of it. Importantly, going forward, this means that the continued increases in advanced economy debt would be expected to put further “sizeable” upward pressure on EMDE interest rates.   4. Rising debt has led to even larger increases in interest rates in countries with a history of default, low credit ratings, frontier market status, heavy reliance on short-term debt, and weak governance.   All in all, the analysis is compelling: with EMDE government debt at historically high levels, additional borrowing may lead to progressively larger jumps in interest rates. This could be a vicious cycle. Thus, EMDES need to strengthen their fiscal positions. This can be achieved through stronger domestic revenue mobilization, more efficient public spending, improved debt management, support for domestic debt market development, and, where appropriate, debt-for-development swaps. But a less clear message is also relevant: even if EMDEs do their homework, the lack of fiscal rectitude in advanced economies could push then in the cycle. One more reason in support to true multilateralism and cooperation.   Enjoy reading https://lnkd.in/exWS4cbf

Total credit to the non-financial sector - private and government - as a percentage of GDP. The broadest measure of the aggregate debt burden carried by the real economy. The series sits at the core of credit-cycle analysis. The Bank for International Settlements has tracked it across countries since the 1960s, and the credit-to-GDP gap built on it is one of the most reliable early-warning indicators of financial crises in cross-country panel studies. What to watch: - Rising trend → leverage building. Early-to-mid cycle. - Plateau at a high level → late cycle. Risk asymmetry deteriorating. - Sharp decline (deleveraging) → post-crisis. Quad 4 dynamics. - Anomalous spike (e.g., 2020) → policy shock. Mean-reversion follows. The US series ran up to ~232% by 2007, deleveraged through the 2010s to a low near 198% in 2018–19, spiked on the 2020 COVID policy shock, and has since climbed steadily to a fresh high. It now sits around 247% - well above the long-run mean near 208% and pressing against the top of its range. What that tells us: aggregate leverage is back near peak. The grind higher since 2021 has been driven heavily by the government side, and the system is now carrying more total debt relative to output than at any point in this dataset. That's a late-cycle reading - risk asymmetry is poor here, with the burden of any rate or growth shock landing on an already-stretched balance sheet. It argues for respecting downside tails rather than assuming a clean runway.

Stunning figure from a new paper by Jonathan Berk and Jules van Binsbergen showing that, while government debt-to-GDP ratios are on a clear upward trend and reaching historically high levels (top figure), other plausible indicators of government indebtedness paint a very different picture (bottom figure): 🔹interest expense-to-GDP ratio (orange) 🔹debt-to-equity ratio (blue) Data are from 19 large countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, France, Germany, Greece, Italy, Japan, Mexico, Netherlands, Russia, Spain, Sweden, United Kingdom, and the United States. Read the full paper here: Jonathan B. Berk and Jules H. van Binsbergen (2026), Why Care About Debt-to-GDP?, National Bureau of Economic Research Working Paper No. 34629: https://lnkd.in/euM5Xjca This is the Abstract: "We construct an international panel data set comprising three distinct yet plausible measures of government indebtedness: the debt-to-GDP, the interest-to-GDP, and the debt-to-equity ratios. Our analysis reveals that these measures yield differing conclusions about recent trends in government indebtedness. While the debt-to-GDP ratio has reached historically high levels, the other two indicators show either no clear trend or a declining pattern over recent decades. We argue for the development of stronger theoretical foundations for the measures employed in the literature, suggesting that, without such grounding, assertions about debt (un)sustainability may be premature."

Rethinking Debt Sustainability: Beyond Debt-to-GDP When we talk about public debt, one number usually dominates the conversation: debt-to-GDP. If it rises, concern grows. If it crosses a perceived threshold, alarm often follows. A recent NBER working paper by Jonathan Berk (Stanford) and Jules van Binsbergen (Wharton) invites us to pause and ask a simple question: why do we rely so heavily on this single ratio? Debt-to-GDP compares a stock (the total amount of public debt) to a flow (one year of economic output). That comparison only makes sense under strong assumptions about long-run growth and interest rates—assumptions that are increasingly fragile in today’s economy. The authors look instead at two other, intuitive measures: Interest payments as a share of GDP → can governments actually afford their debt? Debt relative to national wealth → how large is public debt compared with the economy’s underlying asset base? The results are striking. While debt-to-GDP ratios are at historical highs in many countries, interest burdens are often moderate, and debt relative to wealth shows no clear upward trend. This helps explain a common puzzle: Some countries run into trouble with seemingly low debt ratios Others sustain very high debt for long periods without crisis The difference is not debt alone. It is affordability, wealth, and credibility. The takeaway is simple: debt sustainability is not about one magic number. Looking beyond debt-to-GDP—and focusing on debt servicing capacity and economic strength—leads to calmer judgments and better policy choices. https://lnkd.in/eAHQVfHp #DebtSustainability #PublicDebt #FiscalPolicy #PublicFinance #Macroeconomics #EconomicPolicy #NBER

🌍 Global Debt Just Hit $338 Trillion That’s a 235% debt-to-GDP ratio — with private debt falling (lowest in 10 years) and public debt surging. • US: ~125% debt-to-GDP • China: ~89% • Japan: 255%+ So what does this mean for leaders, investors, and innovators? 🔑 1. The Risk Has Shifted Private debt is down, public debt is up. Governments — not companies or households — are carrying more of the burden. Risk is now in Washington, Beijing, and beyond. 🛡️ 2. The Safety Net Is Thinner In past downturns, governments cushioned economies with stimulus. Today, heavy debt limits those options. Future crises may force hard choices: inflation, higher taxes, or austerity. 📉 3. Growth Faces Pressure Households and businesses are deleveraging. That keeps balance sheets healthier but slows expansion. Without innovation and productivity gains, economies risk stagnation. 💸 4. Investors: Watch Yields Governments will issue more bonds to finance debt. That competes with private capital — keeping borrowing costs high and reshaping investment strategies. ⚠️ 5. Fragility Is Rising On the surface, growth continues. But with leverage this high, any shock — rates, conflicts, or slowdowns — could trigger outsized ripple effects. 👉 Bottom line: The global economy is shifting from a private-debt problem to a public-debt problem. Leaders who see that shift early will be better prepared for the policy, market, and innovation cycles ahead.

𝗪𝗵𝘆 𝘁𝗵𝗲 𝗪𝗼𝗿𝗹𝗱 𝗶𝘀 𝗧𝗮𝗹𝗸𝗶𝗻𝗴 𝗔𝗯𝗼𝘂𝘁 𝘁𝗵𝗲 "𝗝𝗮𝗽𝗮𝗻 𝗦𝗼𝘃𝗲𝗿𝗲𝗶𝗴𝗻 𝗪𝗲𝗮𝗹𝘁𝗵 𝗙𝘂𝗻𝗱" 🇯🇵💡 I’m thrilled to see the Financial Times and the macro-economic community diving deep into the work of our own Yili Chien (St. Louis Fed), Wenxin Du (Harvard Business School) and Hanno Lustig (Stanford GSB). Their recent paper, "Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money," isn't just a technical analysis—it is a masterclass in reframing how we view sovereign sustainability in an aging world. 𝗧𝗵𝗲 𝗔𝗴𝗲𝗻𝗱𝗮: Beyond the Debt-to-GDP Ratio For too long, the conversation around Japan has been stuck on one number: 250% debt-to-GDP. Yili, Wenxin, and Hanno’s research agenda pushes us past that superficial metric. They’ve consolidated the balance sheets of the central government, the BoJ, and social security funds to reveal a startling truth: When you consolidate the balance sheet, Japan’s "crisis-level" 250% debt-to-GDP effectively drops to under 100% and turned itself into a massive, highly-leveraged sovereign wealth fund. 𝗧𝗵𝗲 𝗖𝗼𝗿𝗲 𝗜𝗻𝘀𝗶𝗴𝗵𝘁𝘀:  • The Business of Carry: The Japanese public sector borrows at near-zero floating rates from domestic depositors to invest in high-yield, long-duration assets. This generates a "profit" of roughly 6% of GDP annually—the engine keeping the fiscal ship afloat.  • Duration Mismatch: By shortening debt (via QE) and lengthening assets, the government has created a massive sensitivity to interest rates.  • The Generational Tax: Their agenda also courageously addresses the "welfare" cost—noting how these low-rate policies essentially transfer wealth from younger, less financially sophisticated households to older ones. 𝗧𝗵𝗲 𝗟𝗲𝘀𝘀𝗼𝗻𝘀 𝗳𝗼𝗿 𝘁𝗵𝗲 𝗨.𝗦. 𝗙𝗶𝘀𝗰𝗮𝗹 𝗢𝘂𝘁𝗹𝗼𝗼𝗸: The research offers a sobering "crystal ball" for the U.S. as we face our own growing fiscal pressures. The first lesson is that low interest rates can mask structural insolvency by allowing a government to "earn" its way out of deficits through risk-taking. While the U.S. currently enjoys "exorbitant privilege" with the Dollar, Yili and his co-authors show that relying on a duration mismatch—borrowing short to fund long-term promises—creates a "fiscal trap." When inflation returns and rates rise, the cushion provided by high-yielding assets can vanish, leaving the government with a choice between a fiscal crisis or forcing its citizens to bear the cost through suppressed returns on their savings. Huge congratulations to Yili, Wenxin, and Hanno. It is a privilege to work alongside people who are literally rewriting the book on modern public finance. Check out the full discussion in the FT written by Toby Nangle https://lnkd.in/gDFqnmjR or dive into the paper in the Journal of Economic Perspectives. #Macroeconomics #Finance #Japan #Research #TeamPride #SovereignDebt #FinancialTimes #YiliChien #WenxinDu #HannoLustig

🇺🇸 Moody’s Downgrades U.S. Credit Rating: What It Means for Markets & the Economy The U.S. just lost its last AAA credit rating. Moody’s downgraded the nation to Aa1, citing rising debt, deficits, and political gridlock. Here’s what you need to know: Why This Matters: ✅ First Time in History: The U.S. no longer holds a triple-A rating (AAA) from any of the big three agencies (S&P 2011, Fitch 2023, Moody’s now). ✅ Debt Crisis Warning: Moody’s projects U.S. deficits will hit 9% of GDP by 2035 (vs. 6.4% today) due to: - Soaring interest payments - Entitlement spending (Social Security, Medicare) - Weak revenue growth ✅ Market Reaction: 10-year Treasury yields rose to 4.49% — signaling higher borrowing costs ahead. The Root of the Problem: 1️⃣ Unsustainable Fiscal Path - U.S. debt-to-GDP is ~120% and rising - Trump’s proposed tax cuts could add $4.2 Trillion+ to deficits - No credible plan to control spending 2️⃣ Higher for Longer Rates - Fed policy + sovereign rating downgrade = more expensive debt rollovers - Interest costs alone could hit $1.6 Trillion /year by 2033 Market & Economic Implications: 🔸 Treasuries Under Pressure: If demand weakens, US treasury yields could spike further. 🔸 Corporate & Mortgage Rates: Higher treasury benchmark yields drive corporate and mortgage borrowing costs higher. 🚨 The Bigger Risk: This isn’t just about Trump or Biden—it’s a structural crisis decades in the making. Without major reforms, the U.S. could face a debt spiral that becomes difficult to control (higher rates → bigger deficits → more downgrades). Krishank Parekh | LinkedIn

Bond Market - Loss of Confidence Jamie Dimon is warning that the US bond market is at risk of a significant disruption due to the country's rising debt and persistent fiscal deficits. He stated, "a crack in the bond market is going to happen," emphasizing that excessive government spending and continued quantitative easing have pushed the system toward instability. US Credit Rating Downgrade and Debt-to-GDP Comparison Moody’s recently downgraded the US credit rating from Aaa to Aa1, joining S&P and Fitch in lowering the country’s rating below the top tier. The downgrade was driven by concerns over the $36 trillion US debt, persistent large deficits, and rising interest costs, which are now "significantly higher than those of similarly rated countries". The US debt-to-GDP ratio stands at about 123% in 2025, ranking it eighth globally—higher than most advanced economies except Japan (with a much higher ratio), but above China (96%) and India (80%). Debt Sustainability and Cost of Borrowing The Congressional Budget Office (CBO) and other analysts forecast that US debt will continue to rise, reaching 156% by 2055 under current policies. Interest payments on the national debt are projected to nearly double over the next decade, reaching $1.8 trillion by 2035 and crowding out other government spending. The sustainability of high debt is increasingly in question: as debt grows and interest rates remain elevated, the US will devote a larger share of its budget to debt service, reducing fiscal flexibility and raising the risk of a fiscal crisis. However, risks remain: persistent deficits, higher inflation expectations, and geopolitical uncertainty could keep yields elevated or even push them higher, especially if investor confidence in US fiscal management erodes. Global Comparison The US debt-to-GDP ratio is among the highest in the world, surpassed only by a few countries like Japan. Compared to other developed markets, US borrowing costs are rising faster due to its unique combination of high debt and large, persistent deficits. Brief Takeaways Jamie Dimon warns of a looming bond market crisis if US fiscal policy does not change. US credit rating is now below the top tier at all major agencies, reflecting fiscal concerns. Debt-to-GDP is at 123%, among the highest globally, with projections for further increases. High and rising debt is unsustainable long-term, significantly raising risks of higher borrowing costs and bond market disruption mainly due to loss of confidence in US market by international and domestic investors . #USDebt #BondMarket #CreditDowngrade #FiscalRisk #TreasuryYields #DebtSustainability #MarketOutlook Jamie Dimon warns US bond market will ‘crack’ under pressure from rising debt - https://on.ft.com/3HldBQO via @FT

Over the past 120 years, historical data suggests that when a country's sovereign debt-to-GDP ratio reaches 130%, there's a significant likelihood of default, according to Goldman Sachs (GS). However, in the case of the United States, because it issues debt in its own currency, the risk may lean more towards hyperinflation than default. One challenge the US faces is that a substantial portion of its debt is short-term, limiting the government's ability to reduce the present value of long-term bonds through interest rate hikes. This situation could potentially lead to economic instability if not managed effectively.

Can governments issue infinite debt? 🧐 Ever heard of "Stein's Law"? It's a simple but profound principle coined by Herbert Stein, former chair of Richard Nixon’s Council of Economic Advisers, stating, "If something cannot go on forever, it will stop." ⛔️ Well, it's high time we apply this to the rising tide of global debt. Since the 2007 financial crisis and the 2020 pandemic, we've seen public debt-to-GDP ratios skyrocket to WWII-levels or even record highs. And the situation seems to be getting more complicated. 📈 We're facing a cocktail of challenges: declining growth rates, aging populations, and rising perceptions of risk. This mix could keep long-term real interest rates high and create a vicious cycle of high-risk perception and unsustainable fiscal positions. And let's talk about the US. The Congressional Budget Office projects public debt rising to a whopping 116% of GDP by 2034. That's a level we've never seen before in the nation's history. ⚠️ At some point, Stein's Law has to kick in, right? We could see investor resistance, inflation, and a potential global monetary crisis. The big question is, how do we navigate this? The answer seems simple: start rebuilding fiscal buffers and ensure long-term debt sustainability. But politics and different priorities make this a tough nut to crack. 😲 What do you think? Can we turn the ship around before hitting the iceberg, or are we on a collision course? Let me know in the comments. 👇 PS. If you made it this far, ♻️ share with your network and 🔔 subscribe to my profile.