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As the global economy lumbers on after a devastating pandemic and through rising geopolitical tensions, an unprecedented fiscal challenge looms: a public debt crisis poised to redefine the global financial landscape for generations to come. Global public debt is set to exceed $100 trillion by 2024, representing 93 percent of global gross domestic product and projected to approach 100 percent by 2030. This figure has since exceeded pre-pandemic levels, masking a dire reality, especially when it comes to a surge in challenging scenarios, where global public debt is projected to surge to 115 percent of global GDP within three years, according to the world’s lender of last resort, the International Monetary Fund.
From the Great Depression of the 1930s to the palpable post-pandemic slowdown, the world has seen its fair share of fiscal chasms that spur coordinated action, as well as a rash of austerity measures that often breed new troubles rather than solving old ones. However, the next great “debt-quake” will be vastly different, as it stems from a confluence of factors: increasing spending pressure, and costly climate adaptation initiatives disproportionately affecting already debt-ridden countries considered to be part of the Global South. In addition, as the global order fragments, and middle powers rush to fill the vacuum in the wake of receding hegemonies, a swift pivot toward furthering geopolitical imperatives is straining an already difficult environment.
Furthermore, historically optimistic debt projections combine with substantial unidentified debt, with 40 percent of it arising from potential liabilities, primarily losses in state-owned enterprises — encapsulating the entrenched complexity of this looming crisis. There will be no “winners” in the coming debacle since a global debt implosion of such great magnitude will unleash a polycrisis that will test the mettle of governments worldwide, necessitating an unprecedented and speedy recalibration to avert the worst global financial crisis ever.
An unsustainable cycle of mounting debt is not merely a matter of economic theory to be debated by a small, exclusive circle of elites in gilded enclaves at Jackson Hole or Davos. It is a tangible shared threat to global stability, much like climate change. Policymakers are faced with impossible scenarios where advanced economies grapple with a debt-to-GDP ratio surpassing 100 percent, while also needing to fund unprecedented initiatives in climate resilience and sustaining strained safety nets as populations age. Turning to fiscal austerity will not be the magic bullet many want to believe it will be, since harsh budget cuts can stifle growth and social stability, risking a contagion of unrest and upheaval.
Conversely, unchecked public spending accelerates debt accumulation, fostering an addiction to low-interest rates and quantitative easing measures — a precarious balance likened to walking a tightrope without a safety net. Governments thus face the unenviable task of making reforms that ensure long-term fiscal responsibility without sacrificing critical investments. Failure to do so consigns future generations to a legacy of economic straitjackets and limited public services.
On the other hand, many developing nations face a different predicament altogether, one that is as dire as it is multifaceted. Roughly 54 of the world’s poorest economies remain ensnared in a financial trap where the necessity of attracting funding to spur economic growth clashes with the escalating urgency to cut debt. This dilemma is particularly evident as debt levels soar to around two-thirds of GDP, while growth rates are barely sufficient to ease the burden.
Harsh budget cuts can stifle growth and social stability, risking a contagion of unrest.
Hafed Al-Ghwell
Meanwhile, traditional debt relief measures, albeit helpful in the short term, fail to address underlying structural weaknesses, and often come with strict conditions that limit future borrowing and spending. Realistically, debt restructuring initiatives provide temporary relief, but rarely lead to commensurate economic revival, forcing nations to flirt with the prospect of insolvency. After all, creative solutions, such as debt-for-climate or debt-for-circular-economy swaps, are being platformed as potential game changers, but have yet to gain traction. However, they offer viable alternatives, instead of simply postponing the inevitable — a long overdue recalibration of economic strategies to include sustainable investments as perhaps the only way for building more resilient futures, turning a vicious cycle into a virtuous one.
Nonetheless, the clock is ticking. A demographic shift in developed economies is yet another formidable challenge that will likely worsen the cumulative impact of the coming debt-quake. As the ratio of workers to retirees declines — projected to fall from 4:1 in 2015 to just 2:1 by 2050 in Organization for Economic Co-operation and Development countries — governments face mounting pressure on safety net programs from pensions to healthcare. This strain is compounded by sluggish economic growth in recent years, combined with historically low interest rates, which hampers debt-servicing capabilities.
The US, for instance, is projected to see its public debt surge from 108 percent of GDP in 2021 to over 200 percent by 2050, primarily driven by rising age-related expenditures. This squeeze will ultimately leave little room for foreign aid or debt relief, potentially triggering a domino effect of sovereign defaults among emerging economies. The ripple effects will destabilize global markets, exacerbate income inequality, and fuel geopolitical tensions causing the North-South divide to widen irreversibly. As developed nations grapple with knock-on fiscal constraints, the global economic order — should it survive — will face its toughest balancing act yet between prioritizing domestic welfare or propping up international financial stability.
It is a good sign that the alarm bells are sounding now. However, there is little hope for coordinated and proactive interventions since the looming debt-quake will demand a very radical shift in global economic cooperation, such as unleashing innovative financial instruments intricately tied to the realities of our day at their core.
Debt-for-circular-economy swaps, for instance, offer a promising avenue, expanding on traditional debt-for-nature and debt-for-climate models. Such mechanisms could unlock billions in funding for sustainable development while alleviating crushing debt burdens. By tying debt relief to measurable progress on circular economy initiatives, countries can simultaneously address fiscal constraints and environmental challenges.
However, realizing this potential requires overcoming significant hurdles. Multilateral development banks must play a more active role in de-risking these transactions. Additionally, the international community must confront the glaring reality that 93 percent of climate-vulnerable countries are in or at risk of significant debt distress, spending five times more on debt repayments than climate action. This imbalance calls for a fundamental reimagining of sovereign debt management, potentially including automatic debt relief triggers linked to climate-related disasters or commodity price shocks.
While the task is daunting, the alternative — allowing nations from the Global South to remain trapped between debt servicing and essential investments — is untenable for global economic stability, especially after a debt-quake of significant magnitude strikes.
• Hafed Al-Ghwell is a senior fellow and executive director of the North Africa Initiative at the Foreign Policy Institute of the Johns Hopkins University School of Advanced International Studies in Washington.
X: @HafedAlGhwell