The Organisation for Economic Co-operation and Development stated on Thursday that the total outstanding government and corporate debts globally surpassed $100 trillion last year, as rising interest costs leave borrowers with tough choices and needing to prioritise productive investments.
According to a global debt study by the OECD, governments in its member nations spent 3.3% of their GDP on interest payments, which is more than they spend on defense.
In the last 20 years, interest expenses as a share of output increased from the lowest to the highest between 2021 and 2024.
Although central banks are currently cutting interest rates, borrowing costs are still significantly higher than they were before the rate hikes in 2022, hence, low-rate costs are still being replaced, and interest rates are probably going to keep going up.
This coincides with a period of high government spending. Major economies face long-term costs from the green transition to aging populations.
“This combination of higher costs and higher debt risks restricting capacity for future borrowing at a time when investment needs are greater than ever,” the Organisation for Economic Co-operation and Development said in its annual debt report.
The report stated that despite their sharp increase, interest rates are still below prevailing market rates for over half of OECD countries and nearly a third of emerging market government debts.
Additionally for just under two-thirds of high-grade corporate debt and for nearly three-quarters of junk corporate debt
The organization stated that over 20 per cent of the debt in low-income, high-risk countries is maturing this year, and over half of their debt will mature in the following three years, making them the most vulnerable to refinancing concerns.
The head of capital markets and financial institutions at the OECD, Serdar Celik, stated that when debt costs rise, governments and businesses must make sure their borrowing promotes long-term growth and productivity.
“If they do it this way, we are not worried… If they don’t do it this way, if it adds additional, expensive debt, without increasing the productive capacity of the economy, then we will see more difficult times,” Celik stated.
However, the OECD noted that while corporate investment has decreased since 2008, businesses have increased their borrowing for financial objectives such as refinances or shareholder dividends.
