LONDON – Outstanding government and corporate bonds globally exceeded USD 100 trillion last year, the OECD said on Thursday, with rising interest costs leaving borrowers facing tough choices and needing to prioritize productive investments.
Between 2021 and 2024, interest costs as a share of output rose from the lowest to the highest in the last 20 years. Spending by governments on interest payments reached 3.3% of GDP in its member countries, higher than what they spend on defense, the Organization for Economic Co-operation and Development said in a global debt report.
While central banks are cutting interest rates now, borrowing costs remain much higher than before 2022’s rate hikes, so low-rate debt is continuing to be replaced and interest costs are likely to continue rising ahead.
That comes at a time when governments face big spending bills. Germany’s parliament approved a massive plan to boost infrastructure and support a broader European defense spending push this week. Long-standing costs from the green transition to ageing populations loom for major economies.
“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 Organization for Economic Co-operation and Development said in its annual debt report.
Despite their sharp rise, interest costs are still below prevailing market rates for over half of OECD countries’ and nearly a third of emerging market government debt, as well as for just under two thirds of high-grade corporate debt and for nearly three quarters of junk corporate debt, the report said.
Nearly half of the government debt of OECD countries and emerging markets and around a third of corporate debt will mature by 2027.
Low-income, high-risk countries face the greatest refinancing risks, with over half of their debt maturing in the next three years and more than 20% of it this year, the organization said.
As debt becomes more costly, governments and companies need to ensure their borrowing supports long-term growth and productivity, OECD head of capital markets and financial institutions Serdar Celik said.
“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.”
Yet companies have used higher borrowing since 2008 for financial purposes like refinancing or shareholder payouts, while corporate investment has dropped since then, the OECD said.
Emerging markets dependent on foreign currency borrowing need to develop their local capital markets, the OECD said.
The report found that the costs of borrowing through dollar-denominated bonds had risen from around 4% in 2020 to more than 6% in 2024, rising to more than 8% for riskier, junk-rated economies nations. Those nations have struggled to tap domestic pools of cash due to low savings rates and shallow domestic markets.
Geopolitical tensions
The OECD said funding the net-zero emissions transition was an “immense challenge”. At current rates of investment emerging markets outside of China would face a USD 10 trillion shortfall to meet Paris climate agreement goals by 2050.
If the additional investments needed for the transition are financed publicly, it could send debt-to-GDP ratios 25 percentage points higher in advanced economies and 41 points in China by 2050. If funded privately, energy companies’ debt in emerging markets outside China would need to quadruple by 2035.
Central banks, reducing their bond holdings, have been replaced by foreign investors as well as households, which now hold 34% and 11% of OECD economies’ domestic government debt respectively, up from 29% and 5% in 2021, the OECD said.
But it warned those dynamics may not continue.
Rising geopolitical tensions and trade uncertainties could lead to rapid changes in risk aversion, which could disrupt international portfolio flows, the OECD said.
(Reporting by Yoruk Bahceli; Editing by Susan Fenton and Toby Chopra)
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