(MENAFN- Gulf Times) Rising sovereign debt levels around the world are seen to be taking a toll on macroeconomic stability, just as squeezed government finances create particular risks for developing countries.
Global debt hit a record high of $337.7tn at the end of the second quarter, driven by easing global financial conditions, a softer US dollar and a more accommodative stance from major central banks.
The Institute of International Finance has said global debt rose over $21tn in the first half of the year.
The US currency has weakened 9.75% since the start of the year against a basket of major trading partners.
“The scale of this increase was comparable to the surge seen in H2-2020, when pandemic-related policy responses drove an unprecedented buildup in global debt,” the IIF said in its Global Debt Monitor.
The debt-to-GDP ratios - an indicator of the ability to repay debt by comparing to what is being produced - Canada, China, Saudi Arabia and Poland saw the sharpest increases. The ratio declined in Ireland, Japan, and Norway.
Total debt in emerging markets rose by $3.4tn in the second quarter to a record high of more than $109tn.
The crisis is particularly acute for emerging markets, which face what experts are calling a“perfect storm” of challenging conditions
Emerging markets are facing an unprecedented refinancing challenge with nearly $3.2tn in bond and loan redemptions expected in the remainder of 2025. This massive wall of maturing debt comes at a time when global financial conditions are tightening and borrowing costs are rising across many jurisdictions.
The situation has already manifested in real-world financial stress.
In April 2025, Angola experienced a dramatic crisis when dollar bonds tumbled, triggering a $200mn margin call that pushed yields near 15%, effectively shutting the country out of global capital markets.
This incident exemplifies the vulnerability of emerging market economies to sudden capital flight and liquidity shortages.
One of the most concerning aspects of the current debt crisis is its potential impact on central bank independence and monetary policy effectiveness.
The IIF report has highlighted particular concerns about US debt dynamics, noting that short-term borrowing now accounts for approximately 20% of total government debt and roughly 80% of Treasury issuance.
The debt explosion is also exposing weaknesses in the global financial architecture that have been building for more than a decade.
Since the 2008 financial crisis, financial intermediation has pivoted from lending to private sector borrowers to claims on government, especially in the form of sovereign bonds.
The crisis has been exacerbated by the post-Covid persistence of large fiscal deficits.
The global fiscal deficit continues to average around 5% of GDP, reflecting legacy costs from pandemic responses combined with rising net interest costs, according to the International Monetary Fund. Many governments continue running what amounts to recessionary budget deficits despite having exited recessions years ago.
Governments should revert to previous norms on what constitutes excessive sovereign debt: 40% of GDP for low-income economies, 60% for high-income economies, with everyone else in between, according to a World Bank Blog in June.
More than 3.4bn people now live in countries that spend more on interest payments than on health or education – 100mn more than last year, according to the UN. Debt service payments by developing countries have soared by $74bn in a single year, from $847bn to $921bn.
In a wider sense, public debt can be vital for development as governments use it to finance their expenditures, protect and invest in their people, and to pave their way to a better future. However, it can also be a heavy burden, when public debt grows too much or too fast as it is happening today across the developing world.

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