On the eve of the New Year, we summarize and analyze the events that determined the global picture of the year. This applies not only to social or political aspects, but also to economic indicators that form the foundation of the future. Among them, the situation with the state debt attracts special attention, because its level and dynamics affect not only individual countries, but also the world economy as a whole.
How have countries coped with the challenges of 2024? Did they manage to stabilize debt indicators? And most importantly – what scenarios await us in the new year? We offer to consider the main trends, analyzing the indicators of the debt burden, as well as to evaluate the possible options for the development of events.
Conclusions of the IMF, Eurostat and the World Economic Forum on global public debt
The economic indicators of the European countries were revealed weakerthan expected. This was announced in October review of the IMF. The situation was worsened by rising interest rates, inflationary pressure, low export volumes and the effects of geopolitical instability.
In addition, over the past decade and a half, public debt in the countries of Central and Eastern Europe has increased significantly, which has increased financial risks for the region. Which countries are in the most vulnerable position and how can these circumstances affect the scale of international support for Ukraine?
According to the September report Chief Economists Outlook from the World Economic Forum, most leading economists call the national debt a serious threat to macroeconomic stability.
The recent slowdown in economic growth is compounding the problems associated with high debt levels, which have risen significantly over the past five years. More than half of the interviewed experts note that this challenge applies to both developed and developing countries.
Last year total global public debt reached 93.2% of world GDP, while in the previous year this figure was 84.2%. This growth is caused mainly by large-scale fiscal costs associated with overcoming the consequences of the covid pandemic.
In 54 developing countries, 1/10 of government revenues go to debt payments. It just so happens that 3.3 billion people live in countries where debt service costs more than education and health care. Even the US will spend more this year on debt interest payments ($870 billion) than on defense ($822 billion).
4 out of 10 economists surveyed predict a wave of defaults in developing countries in 2025, forcing governments to delay economic development. This situation threatens new crises.
According to the data Eurostat, in the second quarter of this year, Greece (163.6%) and Italy (137%) had the largest public debt relative to GDP, and the smallest – Bulgaria (22.1%) and Estonia (23.8%). Among those whose national debt is small exceeded France (112.2%), Belgium (108%), Spain (105.3%) and Portugal (100.6%) reached the 100 percent mark.
Why does the United States need to raise the debt limit
It may come as a surprise to some, but the US, usually seen as an economic powerhouse, is also facing the threat of default. Treasury Secretary Janet Yellen stated, that “emergency action” may be needed to avoid this scenario if Congress does not raise the national debt limit by January 14. She urged lawmakers to guarantee the country’s financial stability, stressing that the debt ceiling determines the maximum level of borrowing to meet government obligations. Yellen also drew attention to the political tension surrounding the issue.
After the temporary lifting of the debt limit last June, the period ends on January 2 and the Treasury can resort to “emergency action” to meet financial obligations. This involves suspending investments in pension plans and health care programs to avoid the risk of default. If the debt limit is not increased, the US risks defaulting on important payments, including to investors and social programs.
During the discussion of the government financing bill, Donald Trump unexpectedly proposed to completely abolish the debt limit. This created additional difficulties for Republicans, who usually used the restriction as a tool to pressure Democrats to advance their economic priorities. Now they found themselves in a difficult situation because of this unexpected move by their leader.
In 2021, Janet Yellen criticized the existence of the debt limit, calling it “devastating” and calling for its repeal. Her predecessor called this idea “illogical” back in 2017, noting that it does not control public spending in any way.
Donald Trump, in turn, has previously stated that the debt limit is not necessary, and last week expressed the opinion that the so-called “debt guillotine” should either be extended or canceled before he returns to the Oval Office.
The national debt of the United States exceeded the mark of 36 trillion dollars, having increased by 5 trillion dollars since the suspension of the debt ceiling that year. After its restoration, the limit will automatically increase, taking into account the debt accumulated during this period.
Experts of the Bipartisan Political Center predict that the tipping point, when emergency measures will become ineffective and the risk of default will become real, may come already in the summer.
What can happen in case of default
A US default could be a disaster for the economy of the country and the world. Its immediate consequences will be upheavals in the financial markets: a fall in the value of shares, a sharp increase in interest on public debt and lost investor confidence. The dollar, which is the main currency of the world economy, will become less stable, and the US government will be forced to take on new debts at high interest rates. This will make life difficult for businesses and citizens, causing rising costs, delays in salary payments and social benefits, which will increase social tensions.
In the long run, the consequences of default can be even more serious. The US risks losing its status as a reliable economic partner, and the dollar loses its place as the world’s reserve currency. This threatens to destroy the usual global economic system that depends on the stability of the dollar. The US economy will slow down, and trust in the country as a leader will decrease significantly.
History shows that even the risk of default can have devastating consequences. In 2011, a conflict in Congress over raising the national debt ceiling nearly led to a default. Although the deal was reached, the US credit rating was downgraded, causing turmoil in the markets and raising the cost of borrowing. In 2013, the government’s “shutdown” due to an unapproved budget paralyzed state institutions. Although the default was avoided, it showed the vulnerability of the financial system to political blockades. In recent years, the risk of default has resurfaced, forcing government officials to seek emergency solutions to avoid economic chaos.
Public debt management is an important task for any country
After all, the economic stability of any country depends on it. For example, the US often has to raise the debt ceiling to avoid financial problems and continue to borrow money. This supports the stability of the markets and strengthens the position of the dollar in the world. But if you do this constantly, without adjusting expenses and income, there is a risk that the country will not be able to pay its debts on time, which can worsen the economic condition of the country.
To reduce debt, the government can cut spending or raise taxes. Spending cuts often mean cutting social programs, funding for education, medicine or infrastructure, which causes people to be unhappy and can slow down a country’s development. Raising taxes brings more money to the budget, but reduces the purchasing power of citizens and can also create tension in society.
The best way out may be to find a balance: cut spending a little and raise taxes a little. This will help gradually reduce the debt without significant losses for the economy. At the same time, the worst option is not to agree on any solution, which can lead to default, that is, a situation where the country cannot pay its debts. This will cause economic chaos, undermine confidence in the dollar and affect the entire world.
The example of other countries shows how large debts create problems. For example, Argentina often experiences financial crises due to defaults, while heavily indebted Japan is stable because most of its debt is domestic. In Latin America, high debt limits the development opportunities of many countries.
High public debt also has a negative impact on people’s lives. When the government cuts spending, education, medicine and social care suffer. People pay more for treatment and education, and young people lose opportunities for development. This causes dissatisfaction and reduces trust in the authorities.
In order to avoid such problems, governments should take care of both the payment of debts and the maintenance of the basic needs of citizens. Only thoughtful solutions will keep the economy stable and provide people with a decent standard of living.
…The history of defaults demonstrates their devastating impact: at the beginning of the 21st century, Argentina declared its largest default of $100 billion, which caused an economic crisis and unemployment, and the current radical reforms only deepen social tensions; Greece avoided default in the 2010s thanks to austerity measures, but lost years of economic growth; Russia in 1998 was hit by falling oil prices and a debt crisis, and Mexico in 1982, faced with rising rates and falling oil revenues, plunged into a “lost decade.” These examples emphasize the importance of strategic management of public debt and the need for reforms to avoid similar crises. Next time we will talk about this in more detail…
Tetyana Viktorova
