The world's fiscal house is not in order.
The world's fiscal house is not in order. Global sovereign debt reached $365 trillion in the first half of the year, according to a new report by the Institute of International Finance, more than three times the size of global GDP.
According to the International Monetary Fund, global debt was on track to reach World War II-era levels by 2028 before the Iran war. That record was broken early.
"The conflict is adding to fiscal pressures by causing a spike in energy prices, tightening financial conditions, and slowing growth, and it is unclear how long these pressures will endure," the IMF said in its annual report out this week, which described the world's fiscal picture as "highly worrisome."
In August, debt held by the United States government surpassed $40 trillion, a milestone reached months ahead of forecasts, in large part due to refunds of President Donald Trump's tariffs.
The Iran war has not only added to sovereign debt, but its impact on energy prices also makes it harder to pay off. IMF Managing Director Kristalina Georgieva said in normal times, volatile energy prices wouldn't be as much of an issue, but with debts so large, these aren't normal times.
“Why is this a serious warning? Because that pushes inflation up and that forces central banks to tighten. We have already seen that in a number of places including the United States," Georgieva said.
This month, the Federal Reserve under new Chairman Kevin Warsh announced its first interest rate increase in more than three years. Another hike is expected before the end of the year.
"And when interest rates go up, interest payments go up. And that suffocates the government’s ability to do anything, including to help people with the high cost of living," Georgieva said.
The United States is struggling with this very issue now. According to the U.S. Department of the Treasury, the interest expense of the national debt is about $1.3 trillion in fiscal year 2026, which is more than the country spends on defense. And recently, the 10-year Treasury bond yield hit its highest rate since 2007, making it more expensive for the government to finance debt. It also has a direct impact on mortgage rates, which recently hit an average of more than 7%, according to Freddie Mac.
“I believe the 10-year yield reflects many things, but the need to address the deficit is one of those," Treasury Secretary Scott Bessent told the House Committee on Financial Services last week.
The need to address the debt is obvious. The same cannot be said for the political will required to do it. Experts like those at the Committee for a Responsible Federal Budget say getting such a colossal volume of debt under control would require tough policy moves, like raising taxes, cutting benefits, or a combination of both.
When the national debt hit the $40 trillion mark, the committee's president Maya MacGuineas said the first step must be no new borrowing.
"Whatever motivation our elected officials need to find to finally take action – whether the worries of their constituents back home, the alarm signaled by financial markets, competition from abroad, or the consequences of failing to act – they ought to find it soon," MacGuineas said. "No one knows how many more of these milestone America can take."
