Global debt marches to record high, raising risk of bond vigilantes, IIF says

By Libby George

LONDON (Reuters) - The global debt-to-GDP ratio rose for the first time since 2020 last year, as the world's debt stock hit a new year-end record of $318 trillion and economic growth slowed, an Institute of International Finance report showed on Tuesday.

The $7 trillion rise in global debt was less than half of the 2023 increase, when expectations of Federal Reserve interest rate cuts sparked a borrowing surge. The IIF warned, however, that so-called bond vigilantes could punish governments if rising fiscal deficits persist.

"The increasing scrutiny of fiscal balances — particularly in countries with highly polarized political landscapes — has been a defining feature of recent years," the IIF said.

Market reactions to fiscal policies in the United Kingdom brought down the short-lived tenure of Prime Minister Liz Truss in 2022, while similar pressures in France ousted Prime Minister Michel Barnier last year.

Debt-to-GDP - an indicator on the ability to repay debt - approached 328%, a 1.5 percentage point increase, as government debt levels of $95 trillion clashed with slowing inflation and economic growth.

The IIF said it expects debt growth to slow this year, amid unprecedented global economic policy uncertainty and still-elevated borrowing costs.

It warned, though, that despite high borrowing costs and economic policy uncertainty, its forecast of a $5 trillion increase in government debt this year could rise due to calls for fiscal stimulus and larger military spending in Europe.

"I think we will likely see much more volatility in sovereign debt markets, especially in those countries where we see high political polarization," said Emre Tiftik, the IIF's director of sustainability research.

ROLLOVER CHALLENGE

Emerging markets, driven by China, India, Saudi Arabia and Turkey, accounted for roughly 65% of global debt growth last year.

This borrowing, along with a record $8.2 trillion in debt which emerging markets need to roll over this year - 10% of it in foreign currency - could strain countries' abilities to weather looming political and economic storms.

"Heightened trade tensions and the Trump administration's decision to freeze U.S. foreign aid, including cuts to USAID, could trigger significant liquidity challenges and curb the ability to roll over and access to FX debt," the report said.

"This underscores the increasing importance of domestic revenue mobilization to build resilience against external shocks."

Tiftik added that the high volatility underscored the need to increase multilateral development banks' abilities to mobilize private capital.

Several developing economies, such as Kenya and Romania, have struggled to boost domestic revenue due to public anger over tax hikes and coming elections, respectively.

(Reporting By Libby George; Editing by Hugh Lawson and Ed Osmond)