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Last week France rioted chiefly because of government spending constraints forced by French debt. France's government debt has risen from around 21% of GDP in 1980 to approximately 119% of GDP, while its budget deficit is projected at 5.4% of GDP in 2026 (compared to an economic growth estimate of less than 1%), leaving the government under considerable pressure to restore fiscal discipline. Its response has been to propose a near €54 billion fiscal adjustment programme, involving spending restraint and tax measures at precisely the moment that large sections of the population are demanding higher wages, better public services, and relief from rising living costs.

The result has been widespread protests, including demonstrations involving hundreds of thousands of people, which have in turn raised concerns among investors about the government's ability to implement the reforms necessary to stabilise its finances.

French government bond yields have consequently come under upward pressure, rising to a near quarter-century high, increasing the cost of borrowing and threatening to compound the original fiscal problem. This is the danger inherent in high levels of sovereign indebtedness. As debt servicing costs rise, governments lose the financial flexibility to respond to public demands, attempts to restore fiscal stability provoke political resistance, and that instability itself can further undermine investor confidence.

What begins as a problem of government borrowing can therefore develop into a self-reinforcing cycle of higher interest rates, weaker economic growth, declining public services, and political unrest, with consequences extending well beyond the country concerned.

A Growing Global Burden

France is in some respect an indicator of where global debt numbers are pointing. The chart below estimates total worldwide public and private non-financial debt since the 1950s.

The figure averaged approximately 96.9% of global GDP during the 1950s. By the 1970s, that figure had increased to 115.7%, rising further to 144.8% during the 1990s and 220.4% during the 2010s.

[Non-financial debt is money borrowed by governments, households, and businesses outside the financial sector. It excludes borrowing by banks and other financial institutions. It has three main components. The first is money borrowed by governments to finance expenditure, typically through bonds and loans. The second is household borrowing in the form of mortgages, car loans, personal loans, and other consumer borrowing. The third is money borrowed by businesses such as manufacturers, mining companies, retailers, and property developers – for example, if a mining company borrows $1 billion to develop a new mine, that counts as non-financial corporate debt. If a bank borrows $1 billion from another bank, that borrowing is generally excluded.]

The world has therefore moved from a position in which total debt was approximately equivalent to one year’s economic output to one in which it exceeds two years of output – and the bulk of those outstanding obligations arise from the key economies highlighted below.

An estimate by The Common Sense, drawn from International Monetary Fund (IMF), Bank for International Settlements (BIS), Eurostat, and World Bank datasets, puts total debt in the United States (US) at approximately $77.4 trillion, equivalent to 69.3% of global GDP. China follows with an expanded estimate of $65.6 trillion, or 58.7%, while the European Union (EU) accounts for $39.4 trillion, or 35.3%, and the United Kingdom $8.3 trillion, or 7.4%. Add those together and you get to a single estimated figure of 170.7% of global gross domestic product.

These estimates incorporate government, household, and non-financial corporate borrowing. China’s figure excludes off-budget debt – something The Common Sense has previously written about. 

What does that 170%+ number mean?

The consequences depend heavily on the distribution of that borrowing, the interest rates attached to it, and whether the borrowed capital generates sufficient economic returns.

Three Different Debt Problems

The US presents the clearest sovereign borrowing challenge. Government debt has increased considerably, while persistent fiscal deficits require Washington to borrow substantial sums simply to finance ongoing expenditure and refinance maturing obligations. The US enjoys the considerable advantage of borrowing in the world’s principal reserve currency, but that advantage does not eliminate the costs associated with higher interest rates.

China presents a different problem. Much of its borrowing is concentrated in businesses, property, and infrastructure development, and entities associated with local governments. Estimates are that China’s actual government debt was well in excess of 100% of domestic GDP in 2024, compared with officially recognised government debt of nearer 60%. The difference reflects the off-budget debt question, creating liabilities that pose risks for banks, regional governments, and the wider economy, particularly where the investments financed by that borrowing produce inadequate returns.

Europe's challenge is complicated by substantial differences between member states. Germany has a comparatively modest government debt burden, while France, Italy, and Greece carry much larger liabilities. The EU’s government debt stood at approximately 80.7% of GDP in 2024, but that aggregate disguises the fiscal pressures facing individual countries. Weak economic growth, ageing populations, and demands for higher defence and social expenditure could make those pressures increasingly difficult to manage.

What Happens to Financial Markets?

The central question is whether global financial markets can continue absorbing such large borrowing requirements without a sustained increase in the cost of capital. When governments issue more debt, investors must be persuaded to purchase it. If demand fails to keep pace with supply, bond prices fall and yields rise. Higher government bond yields subsequently influence mortgage rates, corporate borrowing costs, equity valuations, and investment decisions across the economy.

The danger is particularly significant in the US, where Treasury securities provide a benchmark for borrowing costs across international markets. A sustained increase in American bond yields could place pressure on highly indebted governments and businesses elsewhere, including emerging markets. Equities could also become more vulnerable as investors demand higher returns to compensate for holding riskier assets.

There are countervailing forces. Debt is not inherently destructive, particularly when borrowing finances productive investment, and central banks retain considerable capacity to influence financial conditions. Strong economic growth can also reduce debt burdens relative to GDP without requiring absolute reductions in borrowing.

Nevertheless, the longer-term arithmetic is going to absorb a lot of this newspaper’s attention. If borrowing costs remain above economic growth rates, heavily indebted economies may find that an increasing proportion of national income must be devoted to servicing past obligations. Governments would then face difficult choices between taxation, spending restraint, additional borrowing, and accepting higher inflation.

For investors, businesses, and governments, the question is therefore whether the world’s major economies can generate sufficient economic growth to sustain their accumulated obligations. If they cannot, an adjustment must occur through higher interest rates, weaker asset prices (a sharp market pullback), currency depreciation, inflation, or some combination of these forces. Timing a call on this may be the most important investment decision of a generation.