Global debt hits record $348 tn as defence, AI spending surge

Global debt ballooned by nearly $29 trillion last year to touch a record $348 trillion, as governments ramped up spending on defence, national security and artificial intelligence-linked infrastructure, according to the latest figures by the Institute of International Finance (IIF).

The $28.8 trillion jump in 2025 marks the sharpest annual increase since the pandemic-era borrowing spree, underscoring a structural shift in global leverage from the private to the public sector.

“Global debt surged as governments invest in national security and resilience,” the IIF said in its February report, noting that roughly two-thirds of the increase originated in mature markets amid widening fiscal deficits.

Public debt drives the surge

While the headline global debt-to-GDP ratio declined for a fifth consecutive year to about 308 per cent in 2025, the improvement masks a divergence beneath the surface.

The fall in the ratio was entirely due to deleveraging in the private sector. Government debt burdens, in contrast, continued to rise across advanced and emerging markets alike. “In emerging markets, debt-to-GDP ratios continued to rise, hitting a fresh record above 235% of GDP,” IIF said.

Government borrowing alone accounted for over $10 trillion of the overall increase in global debt in 2025. China, the United States and the Euro Area together were responsible for nearly three-fourths of that rise. Within Europe, France and Italy led the expansion in public debt, followed by Germany.

The IIF warned that a potent mix of fiscal expansion, still-accommodative monetary policy and potential regulatory easing could fuel further debt accumulation in the coming years, even as global growth remains resilient.

Europe’s defence reset

A key driver of the new borrowing cycle is a sharp increase in defence outlays, particularly in Europe.

The report estimates that Europe’s defence push could lift EU government debt-to-GDP ratios by more than 18 percentage points by 2035 unless private capital mobilisation accelerates. The build-up comes amid heightened geopolitical tensions and pressure on European nations to boost military spending.

In the United States, federal debt held by the public is projected to rise by more than 20 percentage points to above 120 per cent of GDP by 2036, according to projections cited in the report. Despite concerns over fiscal balances, foreign demand for US Treasuries, corporate bonds and equities remains robust.

AI investment reshapes capital markets

Beyond defence, artificial intelligence has emerged as a new engine of borrowing.

The IIF flagged a surge in bond issuance by AI-linked US corporates, which is on track to hit another record in 2026. Large-scale investments in AI-driven data centres, energy security, transition projects and resilient infrastructure are reinforcing what the report describes as a new “capex supercycle”.

This has been reflected in rising IPO, leveraged loan and high-yield bond issuance, signalling abundant liquidity and strong investor risk appetite.

However, the IIF cautioned that the combined force of fiscal stimulus, easier financial conditions and capex-driven corporate borrowing could result in “episodic overheating and stretched valuations” in parts of the market.

Borrowing costs and yield curves

Record sovereign issuance has also kept upward pressure on borrowing costs. Ten-year government bond yields in the US and UK are hovering around 4 per cent, while Germany’s benchmark yield has climbed above 2 per cent — a marked reversal from the negative yields seen a few years ago.

Longer-term borrowing costs have risen faster than short-term rates, leading to a steepening of government yield curves — typically a sign that investors are demanding higher compensation for increased bond supply and fiscal risk.

Emerging markets face $9 trillion refinancing test

Emerging markets confront a different challenge: refinancing.

The IIF estimates that EMs face over $9 trillion in debt redemptions in 2026, a record high. While accommodative global funding conditions and strong investor appetite for carry trades have helped contain risks so far, the refinancing burden leaves many countries vulnerable to shifts in global liquidity.

Debt-to-GDP ratios in emerging markets have continued to rise, hitting fresh records above 235 per cent of GDP, even as advanced economy ratios have edged lower.

The buildup in sovereign debt among emerging markets has been most pronounced in China, Brazil, Mexico and Russia, the report noted.