IMF warns that global public debt is approaching post-World War II highs, Middle East conflicts are increasing vulnerabilities, and the window for fiscal adjustment is narrowing.

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Global debt pressure continues to rise, and the compounding effects of geopolitical conflicts and structural fiscal imbalances are pushing sovereign debt risks to new heights.

The International Monetary Fund (IMF) warns in its latest Fiscal Monitor report that the ratio of total global government debt to GDP will reach nearly 94% in 2025, and is expected to surpass 100% by 2029 if the current trajectory continues—a debt level previously seen only at the end of World War II.

The outbreak of war in the Middle East has further worsened an already fragile global fiscal landscape, systematically increasing global borrowing costs by disrupting energy supplies, tightening financial conditions, and raising inflation expectations.

The window to advance orderly fiscal adjustment is narrowing, with the United States, Europe, and low-income countries all facing distinct yet equally severe fiscal challenges. "Complacency is not an option."

The deterioration of the debt trajectory is structural

The current worsening of fiscal conditions is not cyclical, but structural.

The global fiscal gap (the difference between the projected primary balance and the primary balance required to stabilize the debt ratio) has fallen from more than 1% of GDP a decade ago to nearly zero, reflecting the far-reaching impact of policy choices among major economies to expand welfare spending or reduce fiscal revenues.

The rapidly rising burden of interest payments directly reflects this deterioration.

The ratio of global interest payments to GDP has increased from 2% to nearly 3% in just four years. As governments refinance maturing debt in a high-interest environment, this pressure will persist. Even in countries where debt dynamics have improved, the levels of public debt remain generally higher than the peaks seen during the COVID-19 crisis.

Changes in the structure of sovereign debt markets have further magnified systemic vulnerabilities.

As central banks shrink their balance sheets, leveraged private investors and hedge funds have become the marginal buyers of government bonds. When market volatility increases, these investors may rapidly reverse their positions, causing liquidity pressures.

The Middle East conflict and multiple downside risks overlap

The outbreak of war in the Middle East is one of the most immediate fiscal downside risks at present.

This conflict may worsen fiscal pressures in various countries through channels such as rising energy prices, tightening global financial conditions, dampening economic activity, and increasing defense spending. If the conflict persists, global at-risk debt levels could rise by another 4 percentage points.

Unlike previous energy shocks, the fiscal impact of this round of conflict is highly asymmetric—energy importing countries, especially low-income developing countries, bear the greatest costs, while major energy exporters in the Gulf region, due to direct involvement in the conflict, benefit much less than historical experience suggests.

Other downside risks should not be ignored. If asset valuations related to artificial intelligence adjust, compounded by a 20% drop in the U.S. stock market and spillover effects on global financial conditions, global at-risk debt levels could rise by another 2.4 percentage points.

Additionally, policy measures driven by protectionist pressures such as industry subsidies and trade support, increased social unrest in multiple countries, and explicit or implicit intervention in central bank independence all amplify fiscal risks.

The U.S. deficit is particularly prominent

Fiscal imbalance in the United States is especially significant. The U.S. economy is near its potential output, but the broad government deficit remains at 7% to 8% of GDP, with no debt consolidation plan in sight.

If this path continues, U.S. total debt is projected to reach 142% of GDP by 2031. To stabilize the debt trajectory, actions on both the revenue and spending sides are necessary, including adjustments to major welfare programs.

The continuous increase in U.S. Treasury supply is compressing the historical safety premium it has enjoyed, and this tightening has driven up borrowing costs globally.

U.S. Treasury yields driven by supply side increases are almost directly transmitted to other countries’ bond markets, with a particularly significant impact on economies reliant on external financing.

Europe and emerging markets face their own constraints

In Europe, several EU member states have invoked deficit rule exemption clauses to meet rising defense spending demands.

Once such spending occurs, it is hard to reverse, highlighting the structural trade-offs faced by countries with limited fiscal space between defense commitments and pressures from aging populations.

In Japan, rising inflation and GDP growth are improving its debt dynamics, but sovereign bond yields have reached historical highs and may have spillover effects on other countries.

Emerging markets and frontier economies overall in 2025 benefit from favorable financing conditions brought by a weaker dollar, but debt levels remain high. Bond issuance by low-rated borrowers has halved and debt maturities have shortened considerably.

In the world’s poorest countries, the ratio of interest payments to fiscal revenue has reached a historic high, and continued reductions in external aid have caused a financing gap that is hard to fill. The IMF recommends that emerging markets make resolving contingent liabilities, scrapping fuel subsidies, and expanding the tax base the core of their medium-term fiscal plans.

IMF urges multi-layered policy response

Facing these challenges, the IMF has put forward policy recommendations across multiple dimensions.

When addressing energy price shocks, it opposes broad price subsidies, arguing that such measures increase fiscal costs, are hard to withdraw, and can suppress domestic price signals; targeted support should be given instead to vulnerable households and businesses capable of sustained operation, coordinated with tight monetary policy.

Institutionally, preserving central bank independence and the integrity of fiscal frameworks is equally important for advanced economies and emerging markets. Clear fiscal communication and transparency are helpful in stabilizing market expectations and securing political support for necessary fiscal adjustments.

For heavily indebted advanced economies, what is required now is orderly and concrete consolidation measures, not merely idealized medium-term targets.

Risk Warning and Disclaimer ClauseThe market has risks, and investment must be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their particular circumstances. Investment based on this information is at your own risk. ```