IMF Warns Global Public Debt Approaching Post-WWII Highs, Middle East Conflict Exacerbates Vulnerability, Fiscal Adjustment Window Narrows

Global debt pressures continue to rise, with the combined effect of geopolitical conflicts and structural fiscal imbalances pushing sovereign debt risks to new highs.

In its latest Fiscal Monitor report, the International Monetary Fund (IMF) warned that the global government debt-to-GDP ratio has reached nearly 94% in 2025, and at the current trajectory, it is projected to exceed 100% by 2029—a debt level not seen since the end of World War II.

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

The window for orderly fiscal adjustment is narrowing, as the US, Europe, and low-income countries all face distinct yet equally severe fiscal challenges; "complacency has no place."

Deteriorating Debt Trajectories Exhibit Structural Characteristics

The worsening fiscal situation 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 shrunk from a buffer exceeding 1% of GDP a decade ago to nearly zero. This reflects profound policy choices regarding expanded welfare spending or reduced revenue collection across major economies.

Rapidly rising interest payment burdens are a direct manifestation of this deterioration.

The global ratio of interest payments to GDP jumped from 2% to nearly 3% in just four years. As governments refinance maturing debt amid high interest rates, this pressure will persist. Even in countries where debt dynamics have improved, public debt levels remain generally higher than their peaks during the pandemic crisis.

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

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

Middle East Conflict and Multiple Downside Risks Converge

The outbreak of war in the Middle East constitutes one of the most immediate fiscal downside risks.

This conflict could exacerbate fiscal pressures across nations through multiple channels: driving up energy prices, tightening global financial conditions, dampening economic activity, and increasing defense expenditures. Under a scenario where the conflict persists, the global at-risk debt level could rise by an additional 4 percentage points.

Unlike previous energy shocks, the fiscal impact of this conflict is highly asymmetric—energy-importing countries, especially low-income developing nations, bear the greatest cost, while major energy-exporting countries in the Gulf region, being directly involved in the conflict, enjoy a narrower range of benefits compared to historical precedents.

Other downside risks cannot be overlooked either. If valuations of AI-related assets adjust, coupled with a 20% decline in the US stock market spilling over into global financial conditions, the global at-risk debt level could rise by another 2.4 percentage points.

Additionally, industrial subsidies and trade support policies driven by protectionist pressures, escalating social unrest in multiple countries, and explicit or implicit interference with central bank independence all act as amplifiers of fiscal risk.

US Deficit Size Stands Out Prominently

The US faces particularly acute fiscal imbalances. Although the US economy is approaching potential output, the general government deficit remains at 7% to 8% of GDP, with no debt stabilization plan yet announced.

At this pace, total US debt is projected to reach 142% of GDP by 2031. Stabilizing the debt path requires action on both revenue and expenditure sides, including adjustments to major welfare programs.

Continued increases in US Treasury supply are compressing the safety premium historically enjoyed by the US, and this narrowing premium is driving up borrowing costs globally.

Rising US Treasury yields driven by supply factors will almost synchronously transmit to bond markets in other countries, affecting economies reliant on external financing particularly significantly.

Europe and Emerging Markets Face Distinct Constraints

In Europe, several EU member states have invoked exemption clauses under deficit rules to meet rising defense spending needs.

Once incurred, such expenditures are difficult to reverse, highlighting the structural trade-offs faced by countries with limited fiscal space in balancing defense commitments against demographic aging pressures.

In Japan, rising inflation and GDP growth are improving debt dynamics, but sovereign bond yields have reached historic highs, potentially creating spillover effects for other countries.

Emerging and frontier market economies generally benefited from favorable financing conditions due to a weaker US dollar in 2025, yet debt levels remain elevated. Bond issuance by lower-rated borrowers has halved, and debt maturities have shortened considerably.

In the world's poorest countries, interest payments now consume a historic high share of fiscal revenues, while declining external aid has created a financing gap that is increasingly difficult to fill. The IMF recommends that emerging markets make resolving contingent liabilities, removing fuel subsidies, and broadening the tax base the core pillars of their medium-term fiscal plans.

IMF Calls for Multi-Level Policy Responses

In response to these challenges, the IMF has proposed policy recommendations spanning multiple dimensions.

When addressing energy price shocks, it explicitly opposes broad-based price subsidies, arguing that such measures increase fiscal costs, are difficult to remove, and may dampen domestic price signals. Instead, targeted support should be directed toward vulnerable households and viable enterprises, aligned with contractionary monetary policy.

At the institutional level, maintaining central bank independence and the integrity of fiscal frameworks is equally critical for both advanced economies and emerging markets. Clear fiscal communication and information transparency help stabilize market expectations and garner political support for necessary fiscal consolidation.

For advanced economies with heavy debt burdens, what is needed now are well-sequenced concrete consolidation measures, rather than merely idealized medium-term targets.