The huge amount of debt that floats around the world has a price. Governments use more and more money to pay interest, which prevents them from using that budget in defense or in other items. Even the United States, the world’s greatest military power, More money is spent on your budget on paying interest than everything that allocates defense, either to pay their soldiers, military operations or weapons. The countries of the Organization for Economic Cooperation and Development (OECD) have spent an equivalent amount to 3.3% of its gross domestic product (GDP) Only in the invoice of interest, according to the latest global debt report of the agency. It is the highest figure since 2010.
Although not much borrowing was relatively cheap, the increases of interest rates in much of the world have changed that dynamic. In the US, the federal fund rate climbed 5.25-5.5%, the peak of this last cycle, while the type of ease of deposit in the eurozone bounced 4%. Although the types are going down or are expected to go down, the end of the cheap money shows in the pockets of governments. Most of the debt they emit offers a fixed interest rate and, in the set of 2024, The average interest that were paid for sovereign debt was 4%, while in 2020 and 2021 that percentage was less than 1%. The increase is evident.
“The rapid increase in the yields of American treasure bonds has added more than 500,000 million dollars to net expenditure for the interests of the US government, which now amounts to about 1.2 billion dollars, or more than the country’s defense budget, “says Yves Bonzon, responsible for the investment of Julius Baer. The data helps to understand Donald Trump’s concern for public spending and his obsession because interest rates are reduced.
That 3.3% on GDP at the OECD interest bill in 2024 is 0.3 percentage points more than the previous year. That is, countries spend more to pay their creditors. Specifically, 23 of the 38 countries of the organization have had to allocate more funds to this. “This increase causes countries to have to allocate a greater amount of government income to pay interest instead of using them for other items,” explains the OECD report. More money is destined to deal with debt than in environmental measures, in leisure and culture, housing, public order and security and defense.
In 2024, the countries of the whole issued 16 billion dollars in sovereign debt, two billion more than the previous year. The amount of bonds that have not yet defeated amounts to 55 billion, so the GDP debt ratio was 84% in 2024. Companies issued nine billions in debt last year and the amount of slope leverage amounts to 35 billion, according to the OECD. On the corporate level, many companies have thrown debt to refinance more debt or pay dividends. Again, this financing is not productive.
“Global debt markets have played a fundamental role in recoveries after the global and pandemic financial crisis by providing capital to governments and companies. However, the role of debt has to change and go from being support to recovery to finance investment and growth. This is a challenge. Debt levels are high and increasingly expensive, while economic growth is slowing down and geopolitical risks are rising, “underlines the same report.
The numbers are important because they affect the decisions of the governments, just what is happening in the US with Donald Trump or the rearmament that plans Europe. In the US, the private sector is in an “exceptional financial situation” because it has been unfolding in the last decade and has taken advantage of the fiscal stimulus of the pandemic. However, the American government “is in the other face of the currency” with one of the highest deficits in history in non -recessive peacetime, Near 7%, explains Julius Baer expert.
Trump’s headache
“This marked dichotomy between the public and private finances of the US is the main motivation behind the apparently erratic political action of the Trump administration,” says Bonzon. The intention of the American president is that the country begins to depend much more on the private sector and much less in the public sector. Therefore, it wants to reduce administration spending or is determined that the Federal Reserve (FED) cut interest rates. This obsession is understood, taking into account that the US is spent more money on interest than in defense and Trump considers that this cannot continue like this.
Although his legislature has surprised many analysts, this explanation helps to understand the focus of their policies. The president said in the Fox that does not want to make economic changes quarter to quarter, but its measures are very oriented in the long term, in transformations for the next century. “Understanding the current panorama of the balances of the main economic blocks is also useful to understand the main policy changes,” says Bonzon.
While the US aspires to less indebtedness and to clean up its accounts, as if that costs a slowdown, Europe is determined to do otherwise already borrow. “However, Washington’s change of policy with respect to Ukraine offers the continent an opportunity to free himself from the ‘Maastricht force shirt’ and move from fiscal austerity to fiscal waste, which means a serious challenge for the first time for the strict compliance of Germany from his ‘zero black’ rule in order to reindustrialize and increase the expense in large -scale defense,” summarizes the expert.
The US has used many more resources than Europe and, specifically, that Germany, to stimulate its economy. That’s why now the turns change. The European locomotive has also supported and stimulated its economy, but in a less aggressive way, remaining “remarkably lagging” with respect to the American country, the Julius Baer analyst claizes. In principle, the community block does want to borrow more for productive purposes and expect to make their investments profitable. That is the challenge.
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