Outstanding government and corporate bonds have now surpassed the $100 trillion mark, according to the latest annual debt report from the Organisation for Economic Co-operation and Development (OECD). This dramatic milestone comes amid an environment of rising interest costs, complex geopolitical tensions, and mounting fiscal pressures. With central banks beginning to cut interest rates after a period of aggressive hikes, the long-term ramifications for borrowers are becoming increasingly worrisome, as higher borrowing costs threaten to stifle productive investments and compound the challenges of financing major government spending programs.

A Record Level of Global Debt

The OECD’s recent report reveals that the world’s debt, comprising both government and corporate bonds, has exceeded $100 trillion. This record-breaking figure underscores the rapid expansion of global borrowing over the past few years. While many central banks are now easing monetary policy in an attempt to stimulate economic growth, the legacy of high interest rates—particularly those implemented since 2022—continues to affect borrowers. The shift from low-rate debt to higher-cost borrowing is well underway, and as older debt is replaced, the increased interest payments could put significant strain on national budgets and corporate balance sheets.

Between 2021 and 2024, interest costs as a share of output rose to levels not seen in the last 20 years. This uptick reflects the dual pressures of increased borrowing and elevated market interest rates, both of which contribute to heavier debt servicing burdens. In advanced economies, while interest costs on many government and corporate bonds remain below current market rates, a significant portion of debt portfolios are scheduled to mature by 2027. This impending wave of refinancing in OECD countries, emerging markets, and corporate sectors raises critical questions about the ability of borrowers to secure favorable terms in an environment of rising risk premiums.

The Impact of Rate Hikes and the Transition to Higher-Cost Debt

In recent years, central banks across the globe raised rates aggressively to combat inflation. These rate hikes, while essential to curbing price pressures, resulted in a significant rebalancing of debt portfolios. Low-rate debt—borrowed before the hikes—has been gradually replaced by new borrowing at considerably higher costs. Although central banks are now beginning to cut rates in response to slowing economic activity, these cuts are from historically high levels. Consequently, the replacement debt remains expensive, and the transition has already led to a substantial increase in interest obligations.

As interest costs climb, borrowers—from national governments to private corporations—face a critical decision: ensure that any new debt is deployed into projects that boost long-term growth and productivity, or risk falling into a cycle of expensive refinancing that hinders economic progress. OECD head of capital markets and financial institutions, Serdar Celik, warned, “If additional borrowing does not enhance the productive capacity of the economy, we will see more difficult times ahead.” This cautionary note reflects the broader consensus among economists that debt-financed growth must be underpinned by investments that deliver sustainable returns rather than merely servicing an expanding debt burden.

Government Spending and Fiscal Pressures

The challenge of managing soaring debt levels comes at a time when governments are also grappling with enormous spending bills. Several advanced economies are facing the dual task of financing critical infrastructure projects and funding social programs, including initiatives to support aging populations and drive the green transition. For instance, Germany’s parliament recently approved an ambitious plan aimed at boosting infrastructure spending while also increasing European defense capabilities—a move that underscores the multidimensional fiscal challenges faced by many countries.

In this context, the report highlights a concerning paradox: while investment needs are greater than ever, rising interest costs and high debt levels may limit the capacity for future borrowing. This dynamic creates a risk that essential investments in infrastructure, healthcare, education, and sustainable energy could be deferred or scaled back, potentially undermining long-term economic growth. As governments navigate these turbulent waters, the OECD report suggests that a strategic recalibration is urgently needed to ensure that borrowing is channeled into initiatives that yield high economic returns.

The Refinancing Challenge for Emerging Markets

Emerging markets are particularly vulnerable in the current debt landscape. Many of these countries depend heavily on foreign currency borrowing, and their ability to tap local capital markets remains limited by low savings rates and underdeveloped financial systems. The OECD report points out that for these nations, refinancing risks are acute: over half of their debt is set to mature within the next three years, with more than 20% maturing this year alone. This exposes emerging markets to the possibility of sharp increases in refinancing costs, especially as global interest rates remain elevated.

For emerging economies, the costs of borrowing through dollar-denominated bonds have risen significantly—from around 4% in 2020 to over 6% in 2024, and even exceeding 8% for riskier, junk-rated nations. The steep rise in interest rates for these bonds further complicates the fiscal landscape, making it more difficult for these economies to finance growth-promoting investments without incurring unsustainable levels of debt. In response, the OECD advises that emerging markets work to develop their local capital markets. A deeper, more liquid domestic market would reduce dependency on external financing and help stabilize borrowing costs over the long term.

Geopolitical Tensions and Trade Uncertainties

The debt dilemma is compounded by a volatile geopolitical environment and ongoing trade uncertainties. Rising geopolitical tensions—ranging from conflicts in Eastern Europe to strategic rivalries in the Asia-Pacific region—could precipitate rapid shifts in global risk sentiment. Such shifts might lead to abrupt changes in international portfolio flows, disrupting the current dynamics of foreign investment in government and corporate debt. The OECD cautions that if risk aversion intensifies, there could be a sudden withdrawal of foreign capital from economies that are already vulnerable, further driving up borrowing costs.

Moreover, ongoing trade disputes and uncertainties over economic policies add another layer of complexity to the debt outlook. For example, trade uncertainties between major economies like the United States and China continue to reverberate through global markets, affecting investor confidence and increasing the risk premiums demanded on sovereign and corporate bonds alike. In this environment, maintaining a steady flow of capital becomes a significant challenge, one that could exacerbate the debt servicing problems faced by many countries.

The Challenge of Financing the Net-Zero Transition

One of the most pressing long-term challenges identified in the OECD report is the financing of the net-zero emissions transition. Achieving net-zero emissions by mid-century requires massive investments in renewable energy, energy efficiency, and low-carbon infrastructure. If these investments are financed through public debt, debt-to-GDP ratios in advanced economies could rise by an additional 25 percentage points, with China potentially facing an increase of 41 points by 2050. Alternatively, if the transition is financed through private borrowing, emerging market energy companies—especially those outside of China—would need to quadruple their debt levels by 2035.

This financing conundrum poses an immense challenge. The additional borrowing required to meet the net-zero target could exacerbate existing debt vulnerabilities, especially if the investments do not immediately generate sufficient economic returns. In this context, policymakers are urged to develop innovative financing mechanisms that balance the need for environmental sustainability with fiscal prudence. Options such as green bonds, public-private partnerships, and innovative climate financing structures are being explored, but their success will depend on the ability to design frameworks that attract both public and private capital without further destabilizing debt markets.

Shifts in Debt Ownership and the Role of Households

Another notable trend in the evolving debt landscape is the shift in debt ownership from traditional institutional investors to foreign investors and households. The OECD report indicates that households now hold 11% of domestic government debt in OECD economies, up from 5% in 2021, while foreign investors hold 34%, up from 29%. This shift reflects broader changes in global financial markets, where investors are seeking alternative sources of yield in a low-return environment.

However, this trend raises important questions about the resilience of debt markets. The diversification of debt holders can have both positive and negative effects. On the one hand, a broader base of investors may help stabilize demand for bonds, particularly if households, which are often seen as long-term investors, maintain their holdings during periods of market turbulence. On the other hand, a heavy reliance on foreign investors exposes economies to the whims of global risk sentiment. In times of geopolitical stress or financial market volatility, rapid reversals in capital flows could force governments into emergency borrowing, further escalating debt servicing costs and potentially triggering a debt spiral.

Corporate Borrowing and Investment Trends

While the focus of the OECD report is on government debt, it also sheds light on trends in corporate borrowing. Over the past decade, companies have increasingly relied on debt financing for purposes such as refinancing, share buybacks, and dividend payouts. Unfortunately, this surge in corporate borrowing has not been matched by a corresponding increase in productive investment. Instead, many firms have used cheap debt to reward shareholders rather than to invest in new technologies, capacity expansion, or research and development.

This trend is particularly concerning in a context where corporate investment has been on a downward trajectory since the global financial crisis of 2008. With a significant portion of corporate debt now classified as high-grade or even junk, the risk profile of the corporate sector is growing more complex. If companies continue to prioritize short-term financial maneuvers over long-term investments in productivity, the overall capacity for economic growth may be undermined. The OECD warns that without a shift towards more productive uses of debt, the financial system could face increased instability, and the broader economy might suffer from a persistent lack of dynamism.

Policy Recommendations and Future Outlook

Given the multifaceted challenges posed by record-high debt levels and rising interest costs, the OECD’s report puts forth several policy recommendations aimed at mitigating risks and promoting sustainable growth:

• Prioritize Productive Investments: Governments and corporations must ensure that new debt is allocated to projects that enhance long-term productivity. This includes investments in infrastructure, technology, education, and clean energy—all of which can generate positive returns over time.
• Develop Local Capital Markets: Particularly for emerging markets, expanding and deepening domestic financial markets can reduce reliance on volatile foreign currency borrowing. This would help stabilize borrowing costs and improve financial resilience.
• Innovate in Climate Financing: With the net-zero transition on the horizon, innovative financing tools such as green bonds and climate funds must be scaled up. These instruments can attract private capital without unduly burdening public finances.
• Enhance Debt Management Frameworks: Both advanced and emerging economies should invest in robust debt management practices that allow for timely refinancing and proactive risk assessment. Transparent policies and clear communication strategies can help maintain investor confidence.
• Diversify Debt Ownership: Encouraging a broader base of debt holders, including long-term institutional and household investors, may help cushion the impact of sudden capital flight and reduce market volatility.

Expert Commentary: Navigating a New Debt Era

Economic experts and financial analysts have long warned that the post-pandemic recovery phase would be characterized by high levels of public and corporate debt. Now, with global debt exceeding $100 trillion, these warnings are becoming a reality. “The challenge now is not only to manage existing debt but to ensure that future borrowing is channeled into growth-enhancing activities,” said Serdar Celik, OECD head of capital markets and financial institutions. His remarks reflect the broader consensus among policymakers: the quality of debt matters as much as its quantity.

Analysts point out that many advanced economies, which have benefited from decades of low-interest rates, now face a structural shift. While monetary policy is beginning to ease, the underlying cost of borrowing remains elevated compared to pre-2022 levels. This creates a precarious situation where governments and corporations must contend with higher servicing costs, even as they seek to stimulate growth through fiscal and investment policies.

Furthermore, the evolving geopolitical landscape adds another layer of uncertainty. Trade disputes, regional conflicts, and shifting alliances can all trigger rapid changes in market sentiment, making the task of debt management even more challenging. In this context, the OECD report serves as a stark reminder that fiscal discipline and strategic planning are essential for navigating the complexities of the new debt era.

Conclusion

The OECD’s report, revealing that global debt has soared beyond $100 trillion, highlights a turning point in the global economic landscape. Rising interest costs, fueled by the transition from historically low-rate borrowing to new debt at higher rates, present significant challenges for both governments and corporations. With high debt servicing costs, looming refinancing risks, and the enormous financing needs of the net-zero transition, policymakers face a delicate balancing act between stimulating growth and maintaining fiscal sustainability.

For advanced economies, the challenge is to ensure that government spending on infrastructure, defense, and social programs does not crowd out productive investments. For emerging markets, the task is even more daunting, as these countries grapple with the twin challenges of high refinancing risks and underdeveloped local capital markets. Amid geopolitical uncertainties and rapidly shifting global risk sentiment, the need for strategic debt management has never been more acute.

As the world moves forward, the focus must be on transforming the debt challenge into an opportunity—one that supports long-term growth, innovation, and sustainable development. The path forward will require a coordinated effort from governments, financial institutions, and the private sector. By prioritizing productive investments, developing robust domestic financial markets, and innovating in the realm of climate financing, the global community can navigate this complex debt landscape and secure a more stable and prosperous future.

In summary, the unprecedented level of global debt, combined with rising interest costs and a host of economic and geopolitical challenges, underscores the need for prudent fiscal management and strategic investment. As the OECD’s findings illustrate, the decisions made in the coming years will have far-reaching implications for economic growth, financial stability, and the overall health of the global economy. The world is now at a crossroads, and the ability to manage debt effectively while fostering sustainable growth will be a critical determinant of future prosperity.

With central banks, governments, and corporations all working to adapt to this new reality, the coming years promise to be a defining period for global economic policy. The record-breaking debt levels and escalating interest costs serve as both a warning and a call to action—a call for decisive measures to ensure that borrowing today paves the way for a more resilient and dynamic tomorrow.

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By: Montel Kamau

Serrari Financial Analyst

21st March, 2025