Under pressure: Tracking the pain in G7 government debt

Debt is roughly equal to or higher than economic output across the G7 bar Germany, Europe’s biggest economy. The 2008 global financial crisis, the 2011-12 euro zone debt crisis and the 2020 pandemic all increased debt levels, hurting growth. More recently, the Russia-Ukraine war, the Iran war and extreme heat have added to spending needs. Japan has the highest level, with debt more than double its output, while even Germany, once a champion of austerity, is ramping up its borrowing. Germany’s finance ministry told Reuters that Russian aggression was driving up funding needs for massive defence investment, pushing borrowing costs higher. Ageing populations, interest bills and increased spending on defence and climate change could raise debt levels further. Higher post-pandemic borrowing costs are feeding into governments’ interest payments. While well below historical peaks for many countries, interest payments as a share of output have risen steadily across most G7 countries recently, notably in the United States. In fact, interest payments across OECD countries, including the U.S., already topped defence spending in 2024. Government bond yields across the G7 have surged following the COVID-19 pandemic and Russia’s invasion of Ukraine, as central banks raised interest rates aggressively to tame surging inflation. Elevated longer-term borrowing costs also reflect that investors want better returns to compensate for the risk of holding the debt. A surge in borrowing by AI "hyperscalers" is an added pressure, as buyers demand higher returns to keep purchasing the flood of bonds hitting markets. The difference between shorter and long-dated government bond yields has increased sharply, making it relatively more expensive to borrow for longer. The pressure is being intensified by fiscal concerns, central banks reducing bond holdings and some big traditional investors in long-term debt such as insurers and pension funds reducing their purchases from Japan to Britain. The term premium on U.S. Treasuries, a key measure of how much compensation investors demand for the risk of holding longer-term bonds, has risen since the pandemic. That reflects anything from concern about U.S. fiscal policy to the Federal Reserve cutting its bond holdings, longer-term inflation uncertainty as well as worries about clear communication under new Federal Reserve Chairman Kevin Warsh. It’s a global phenomenon. The term premium across major OECD countries reached its highest in over 10 years, the organisation found recently. If there is one debt metric that has improved for some, it’s how little investors are now willing to be paid to hold individual euro zone governments’ bonds relative to those of Germany, which is deemed Europe’s safest borrower. Japan’s benchmark 10-year bond yield is on the brink of hitting 3% for the first time since the mid-1990s, highlighting how inflation, rising fiscal concerns and monetary policy expectations are reshaping a market long defined by low interest rates. Japan, the most indebted country in the developed world, is in the spotlight because the spending plans of Prime Minister Sanae Takaichi have rekindled fiscal concerns. The nation’s debt sales are carefully watched for signs of stress and yields have risen sharply at bond sales in recent months. It has trimmed longer-dated bond sales in response, helping stabilise demand. Still, borrowing costs face upward pressure. And that creates a global quandary. If more attractive yields lure Japanese money home, what has been a pillar for U.S. and European debt markets for decades could start to crumble. Government debt and borrowing costs are near their highest in decades as the world’s major economies face ever-increasing spending demands — from ageing populations to climate change and defence. This year, the Iran war has rekindled inflation risks, while damage wrought by Europe’s increasingly volatile weather is a further strain on public finances. U.S. debt has topped $40 trillion for the first time, underscoring the pressures on the Group of Seven (G7) advanced economies.

Under pressure: Tracking the pain in G7 government debt

Debt burdens and interest payments

Rising yields and shorter maturities

Country spreads, Japan and global spillovers

G7 government debt and borrowing costs under pressure

Related News

Amex Halt MHX Add Info Lst 14.065300

UK cinemas restricting Meta AI and other smart glasses over piracy concerns

Under pressure: Tracking the pain in G7 government debt

Amex Halt BTCK.A Add Info Lst 24.325000

Goldman Sachs holds 5.5% stake in Alstom