Apart from oil, wars and everything in between, the mounting debt problem has given rise to enough headlines for it to be a major talk in town – been a long time coming. Governments across the world continue to borrow to bridge their long running deficits while the AI boom has absorbed so much private capital towards companies with stark valuations but are yet to show ‘real’ returns. The recent shake-ups in the global trade landscape and the oil shock which does not seem to settle down anytime soon, have already given strong signals for a global recession in the near future. Add on the severe consequences of a possible debt fallout on top of that, it could potentially lead to a much bigger problem.
The ‘vicious cycle’
According to the latest figures posted by the Institute of International Finance (IIF), global debt rose more than USD 10 trillion in the first half of 2026, raising the total debt stock to USD 365.5 trillion by end June 2026 – a historic high. Unlike previous episodes of rising debt – Global Financial Crisis in 2008 or the Covid-19 pandemic – the problem this time around is that borrowing costs are not that cheap.
What we see right now is that as state debts continue to rise, so do yields on government bonds, reflecting the growing investor discomfort stemming from high rates, rising costs, slow growth and high fiscal spending. The worlds’ biggest economies – including in the U.S., Japan, France and the U.K – recently hit the highest yields on their long-term bonds in more than a decade!
As yields on benchmark assets such as US Treasuries rise, borrowing costs for businesses, households, and governments will also increase. Add on the rising cost of oil onto this that could potentially hike inflation further from this point – this could force central banks to maintain monetary policy tightness causing emerging markets to make a difficult choice between raising interest rates to retain capital or risking further capital outflows.
The IIF has warned that governments could become trapped in a ‘vicious cycle’, where persistent fiscal deficits cause further borrowing, while rising interest payments increasingly limit their ability to bring down those deficits.
Warning signs issued
The head of the International Monetary Fund – Kristalina Georgieva - has urged major economies to exercise greater fiscal discipline as rising bond yields place increasing pressure on government budgets. The IMF says public debt is at the highest level since World War Two and is projected to exceed 100% of GDP before 2030, signaling out advanced economies, led by the United States, as the “worst offenders” on debt loads, with debt-to-GDP ratios higher than emerging markets and low-income countries.
At a more institutional level, The Financial Stability Board (FSB) - the global body that monitors risks to the financial system – have identified some countries that are unprepared for bank failures, if at all one is to take place. A review of 19 jurisdictions found that many countries remain inadequately prepared to support financial stability during major banking crises, nearly two decades after the 2008 financial crisis. The FSB highlighted that several governments have yet to implement critical mechanisms needed to manage large bank failures. Only Hong Kong, Japan, the US and UK were found to be fully compliant with its requirements, while India and Argentina were classified as non-compliant. The EU banking union and Switzerland were among those deemed materially non-compliant.
The add-on of AI worries
Then there are the booming AI companies that are re-shaping the way global debt markets work – companies that are borrowing trillions of dollars despite high interest rates. In 2026, the volume of U.S. corporate bond issuance has already reached $1.69 trillion, Bloomberg reports. These giants are borrowing trillions and are counting on substantial future profits. For instance, OpenAI expects its annual revenue to reach at least USD 70 billion by the end of the year while investors fear that the market will struggle to absorb such a volume of new debt obligations.
Experts caution that heavy borrowing by technology firms could push up financing costs for other businesses. This pressure may already be weighing on corporate borrowing, with U.S. companies issuing just USD 11.4 billion in bonds last week, well below the expected USD 25-30 billion, suggesting that traditional borrowers are becoming more cautious.
What does it mean for Sri Lanka?
Despite debt figures across the world continuing to rise, it does not immediately signal an outright financial crisis. As Sri Lanka continues on its re-building path by maintaining strong fiscal performance and settling its dues both on the domestic and external front, the journey ahead seems quite manageable. Even with regards to the ongoing IMF program and the related debt indicators, Sri Lanka seems to be well on track to hit the targets over the next few years.
Over the medium to long term, how governments navigate this rising debt burden will have important implications for global interest rates, exchange rates, trade and capital flows. This is particularly relevant for Sri Lanka, which is seeking to accelerate growth following a period of economic stabilization. Opening up to foreign capital and expanding trade with the rest of the world remain key to this effort. However, sustaining growth momentum must go hand in hand with maintaining strong liquidity buffers, adequate foreign exchange reserves and sufficient safeguards to absorb potential losses arising from future crises.