By Yoruk Bahceli
LONDON (Reuters) – Outstanding government and corporate bonds globally exceeded $100 trillion last year, the OECD said on Thursday, with rising interest costs leaving borrowers facing tough choices and needing to prioritise 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 defence, the Organisation 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 defence 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 Organisation 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 organisation 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 refinancings or shareholder payouts, while corporate investment has dropped since then, the OECD said.
