World’s Debt Pile Swells to a Record $348 Trillion as Government Borrowing Races Ahead of Growth

The world is carrying more debt than at any point in recorded financial history. According to the Institute of International Finance’s latest Global Debt Monitor, published on February 25, 2026, total global debt reached $348 trillion at the end of 2025 — a single-year increase of nearly $29 trillion that marks the fastest pace of debt accumulation since the pandemic-era surge in 2020 and 2021. The figures paint a portrait of a global economy increasingly reliant on borrowed money to sustain growth, fund governments, and finance a new wave of infrastructure investment — even as the window for diluting that debt through economic expansion remains narrow.

The surge was overwhelmingly a government-driven story. Sovereign borrowers accounted for more than $10 trillion of the $29 trillion increase, with the United States, China, and the euro area collectively responsible for roughly three-quarters of the total jump. The composition of global debt is shifting structurally: private-sector debt ratios have retreated from their pandemic peaks, while public debt continues to expand. That tilt leaves global balance sheets increasingly exposed to fluctuations in interest rates and investor confidence in sovereign creditworthiness.

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The Numbers in Detail: A World Drowning in Sovereign Leverage

The IIF’s breakdown of the $348 trillion total reveals how comprehensively the debt buildup has spread across sectors and geographies. Government debt globally stood at roughly $106.7 trillion at year-end, up sharply from $96.3 trillion at end-2024 — a $10.4 trillion single-year increase that reflects the scale of fiscal deficits running across major economies. Non-financial corporate debt reached about $100.6 trillion, while household liabilities rose more moderately to $64.6 trillion.

Geographically, mature markets now carry around $231.7 trillion in total debt, while emerging markets have reached approximately $116.6 trillion — both fresh all-time highs. As a share of economic output, however, the picture is more nuanced. Global debt edged lower to about 308% of GDP in 2025, the IIF reported, largely because nominal GDP growth in advanced economies was strong enough to modestly reduce the ratio. But this improvement was not evenly distributed: debt ratios in emerging markets continued climbing to a record above 235% of GDP, a new high that signals compounding vulnerability in the developing world.

The structural shift within the debt pile is significant. Over the past decade, policy debates have often focused on household or corporate leverage. Today’s concern is categorically different: it is governments that are driving debt higher, and governments have fewer mechanisms to rapidly reduce borrowing. Sovereign debt cannot be restructured through bankruptcy. When public debt ratios rise, the adjustment path typically requires years of fiscal consolidation, higher taxation, reduced public services, or inflation — all of which carry political and economic costs that make rapid correction difficult.

The Three Engines: United States, China, and the Euro Area

United States: A Deficit Machine Running at Full Speed

The United States remains the world’s single largest contributor to sovereign debt accumulation. According to the U.S. Government Accountability Office, total federal debt stood at $37.6 trillion at the end of fiscal year 2025 — an increase of $2.2 trillion from FY2024. The Congressional Budget Office reported a fiscal year 2025 deficit of $1.8 trillion, equal to 5.9% of GDP — above the 50-year historical average of 3.8% and exceeded in the postwar era only during the 2009–2012 financial crisis aftermath and the COVID pandemic years of 2020–2021.

Perhaps most alarming is the trajectory of debt servicing costs. Net interest on the U.S. national debt surpassed $1 trillion for the first time in FY2025, becoming the second-largest category of federal expenditure after Social Security. The Committee for a Responsible Federal Budget estimates that net interest is on track to more than double to $2.1 trillion by fiscal year 2036 under current law — a trajectory that would see interest payments alone consume an increasing share of every tax dollar collected, crowding out investment in infrastructure, education, and defense. The debt limit was raised by $5 trillion in July 2025 to $41.1 trillion, a figure that itself underscores the scale of the fiscal challenge ahead.

Looking forward, the Congressional Budget Office projects a $1.9 trillion deficit for FY2026, with deficits expected to average more than 6% of GDP over the next decade — a pace that would continue adding trillions to the debt stock each year regardless of the economic cycle.

China: Debt Reaches 302% of GDP as Fiscal Expansion Accelerates

China’s contribution to the global debt surge is equally significant, though measured differently. In 2025, Beijing set its fiscal deficit ratio at approximately 4% of GDP — a record for modern China and an increase of one percentage point from 2024 — while new government debt issuance reached 11.86 trillion yuan, or approximately $1.7 trillion. The government ran what Bloomberg described as a record budget deficit, with broad expenditure exceeding government revenue by 12.7 trillion yuan as social welfare spending grew at its fastest pace since 2017.

The broader debt picture is staggering. China’s macro leverage ratio — a measure of total economy-wide debt relative to nominal GDP — rose by 11.8 percentage points to 302.3% in 2025, according to research from the National Institution for Finance and Development, a government think tank. This exceeded even the 10.1 point increase recorded in 2024 and marked the first full year in which China’s total debt-to-GDP ratio remained above 300%. Critically, the increase was driven less by excessive credit expansion than by weak nominal GDP growth — China’s nominal GDP expanded just 4%, its slowest rate since the pre-reform era except for the COVID shock of 2020. When nominal growth slows, the same volume of new borrowing produces a larger increase in the debt ratio.

The IMF’s Article IV consultations noted that China’s augmented debt, including local government financing vehicles, has risen to approximately 124% of GDP — a figure that encompasses the off-balance-sheet borrowing structures that have long been a source of systemic risk in the Chinese financial system.

Euro Area: Defense Rearming Adds a New Debt Dimension

The euro area’s contribution to the global debt surge in 2025 was shaped not just by standard fiscal dynamics but by a structural shift in government priorities: a rapid and broad-based increase in defense spending driven by the continuing geopolitical shock of Russia’s war in Ukraine. EU member states’ combined defense expenditure reached an estimated €381 billion in 2025, an 11% increase from 2024 and a 63% increase from 2020, bringing collective spending to 2.1% of GDP — exceeding NATO’s previous 2% benchmark for the first time.

The pace is set to accelerate further. At the NATO Hague Summit in June 2025, Allied heads of state agreed to a target of 3.5% of GDP for core defense spending by 2035, with an additional 1.5% for defense-related infrastructure. The European Commission’s Readiness 2030 initiative is planning to create additional fiscal space of up to €800 billion over the next four years to support this rearming. Germany alone approved a historic constitutional reform exempting defense spending beyond 1% of GDP from debt limits, enabling a €500 billion fund for defense and infrastructure.

The IIF explicitly identified European defense spending as a new driver of public debt accumulation. Its report warned that EU government debt-to-GDP could rise by over 18 percentage points by 2035 if defense spending ramps toward NATO’s 5% target without a commensurate increase in private capital mobilization. The fiscal mathematics are unambiguous: more defense spending financed through borrowing means higher sovereign debt, higher interest burdens, and less fiscal space for other priorities unless growth accelerates materially.

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The Supercycle Thesis: AI, Energy, and Infrastructure as New Debt Drivers

Beyond the immediate drivers of government deficits and defense spending, the IIF’s Global Debt Monitor flagged an emerging structural force that could sustain high debt levels for years: a new wave of capital expenditure “supercycles” centered on artificial intelligence infrastructure, energy security and transition, and resilient supply chains.

The report noted that “easier financial conditions should support efforts to mobilize much-needed capital for national priorities, including defense finance,” and described a “powerful new wave of global capital expenditure supercycles” in AI-driven data centers, energy transition, and infrastructure as a major growth engine for global debt markets. Corporate borrowers have been active participants in this trend. U.S. investment-grade bond issuance is on track for another strong year in 2026 following a rapid January, helped by large technology and industrial issuers financing capital-intensive AI buildouts and manufacturing expansion.

The IMF, in its January 2026 World Economic Outlook update, estimated that the AI investment boom could lift global growth by as much as 0.3 percentage points in 2026 — a meaningful tailwind in a world where growth rates barely exceed 3%. But the IMF simultaneously flagged the AI boom as a downside risk: if expectations of AI-driven productivity gains fail to materialize, the resulting correction in high market valuations could tighten financial conditions and crimp demand across the broader economy, potentially making the debt accumulated during the investment wave harder to service.

High-yield bonds, leveraged loans, and IPO markets have all benefited from the current risk appetite. The IIF noted that easier funding conditions and strong risk appetite have supported issuance across these segments — a dynamic that, while presently orderly, adds to the systemic leverage that financial markets would need to absorb during a stress event.

Growth Cannot Save the Situation: The Arithmetic Problem

The critical question posed by the IIF’s data is whether global economic growth will be strong enough to dilute the debt stock faster than borrowing accumulates. The answer, based on current projections, is almost certainly not — at least not in the near term.

The IMF’s January 2026 World Economic Outlook projected global growth of 3.3% for 2026 and 3.2% for 2027 — rates described as “steady but moderate.” Advanced economies are expected to expand at roughly 1.8%, while emerging markets should grow just above 4%. The U.S. is projected to expand at 2.4% in 2026, China at 4.5%, and the euro area at a subdued 1.3%. These are not recession numbers, but neither are they the kind of above-trend growth that would rapidly reduce debt ratios, particularly in a world where nominal GDP growth is constrained by persistent disinflation pressures in Asia and by elevated real interest rates globally.

The arithmetic is unforgiving. If total global debt is $348 trillion and growing at roughly $29 trillion per year, while nominal global GDP grows at perhaps 5-6% per year (combining real growth and inflation), the debt-to-GDP ratio only falls if the denominator grows faster than the numerator. In the current environment, that calculus is uncertain at best.

The Emerging Market Danger Zone: $9 Trillion in 2026 Refinancing Needs

The most acute near-term risk highlighted by the IIF lies not in the advanced economy debt stock — which, though enormous, is largely financed in domestic currencies and faces deep, liquid investor bases — but in emerging markets.

Emerging markets face more than $9 trillion in debt redemptions in 2026, the IIF estimated — a record refinancing burden representing the annual rollover of bonds and loans coming due across dozens of developing economies. Meanwhile, mature markets face over $20 trillion in maturing bonds and loans. Both figures underscore how much of the global debt stock must be continuously refinanced in capital markets, making the debt pile deeply sensitive to sudden changes in investor risk appetite, rising global interest rates, or a strengthening of the U.S. dollar that raises the real cost of dollar-denominated obligations for non-U.S. borrowers.

The emerging market debt ratio — already at a record above 235% of GDP — is particularly vulnerable to the same dynamic that pressured China in 2025: when nominal growth slows or currencies weaken, the debt ratio rises passively even if borrowing remains flat. Countries with limited access to domestic financing, weaker institutional frameworks, or high dependence on commodity revenues face a compounding challenge: they may need to borrow externally at precisely the moment when global investors become more selective about risk.

For now, the IIF reported that strong demand has kept funding conditions orderly. January 2026 saw one of the busiest starts to a year on record for sovereign bond issuance globally, with governments rushing to pre-fund budget needs while investor demand remained firm. But this demand is not unconditional, and the combination of elevated public borrowing, heavy rollover needs, and record early-year issuance means that the margin for error is shrinking.

What Comes Next: Policy Choices Will Determine the Trajectory

The IIF’s report concluded that fiscal policy choices are “increasingly determining the direction of the world’s balance sheet” — an observation with profound implications. In an era of politically constrained fiscal consolidation, persistent geopolitical spending pressures, and AI-driven investment booms, the incentives that would reduce debt accumulation are largely absent in the world’s largest economies.

Governments face a structural dilemma: the same forces driving debt higher — defense spending, AI infrastructure, energy transition, aging population costs — are also politically popular or strategically necessary. The trade-offs required to stabilize debt ratios, such as higher taxes, reduced entitlements, or deferred infrastructure investment, face intense political resistance in virtually every major democracy. The IIF’s warning about a “powerful mix of fiscal expansion, accommodative monetary policy, and lighter-touch regulatory simplification” driving further debt accumulation reflects this reality precisely.

The global debt trajectory heading into the second half of the 2020s is one of persistent elevation near historical highs, with fiscal policy choices — rather than market forces or central bank tightening — increasingly determining whether that trajectory bends downward or continues climbing. At $348 trillion and rising, the stakes of those choices have never been higher.

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By: Montel Kamau

Serrari Financial Analyst

27th February, 2026