Developed market debt to hit record $75.8 trillion as shocks and spending pressures mount, Fitch says

Government debt across ⁠developed ⁠economies is set to climb ⁠to a record $75.8 trillion by the end of 2026 as countries ​struggle with persistent budget deficits, geopolitical tensions and rising spending demands, Fitch Ratings said on Tuesday.

The ‌ratings agency said debt in ‌developed markets would increase by $4.2 trillion this year alone, taking the total to the ⁠equivalent of ⁠104% of gross domestic product, up sharply from $26 trillion, or 68% of ​GDP, two decades ago. 

Fitch expects the 10 largest developed economies to account for $69 trillion of that total, equivalent to 114.5% of GDP, highlighting the outsized role of the United States and several ​other large borrowers in driving global debt accumulation.

The agency forecast the U.S. would record ⁠the ⁠largest government budget deficit among ⁠major developed ​economies this year at 7.8% of GDP, or roughly $2.5 trillion. France is expected to post ​a deficit of 5% ⁠of GDP, followed by Britain at 4.8%, Germany at 3.7% and Japan at 3.1%. 

It warned a series of shocks, including the global financial crisis, the euro zone debt crisis, the COVID-19 pandemic, Russia’s invasion of Ukraine and the ongoing U.S.-Iran conflict, had all contributed to ⁠a long-term ratcheting up of debt. 

Governments are also facing growing structural spending pressures ⁠linked to defence, ageing populations, climate change adaptation and higher interest costs. Fitch estimated European defence spending could rise by an average 0.6% of GDP between 2025 and 2029. 

Higher debt levels are also increasing market risks. Although 10-year government bond yields in major markets have eased slightly since peaking during the U.S.-Iran conflict, they remain about 51 basis points above pre-war levels.

Looking further ahead, the U.S. debt-to-GDP ratio is projected to climb to 131.5% by 2030 from around 120% ⁠in 2026, while Japan’s ratio is forecast to dip slightly, although it will remain the highest in the group at nearly 192%. 

Artificial intelligence could boost growth and improve debt sustainability, especially in the U.S., Fitch said. However, it could ​also lead to higher unemployment and social outlays and also lower tax ​revenues.

Global stock markets may just be weary of ⁠the back-and-forth in the Middle East, but they latched onto a sliver of hope in the still-raging U.S.-Iran ​conflict overnight. Reports of some mediation efforts sent Brent crude prices back below $90 per barrel, even as renewed fighting continued into its 10th day and the conflict risked spreading.

I’ll ‌get into all that and more below.

But first, ‌check out my column on why markets are likely hoping new UK Prime Minister Andy Burnham succeeds, whether they agree with his policies or not.

And listen to ⁠the latest episode of ⁠the Morning Bid daily podcast. Subscribe to hear Reuters journalists discuss the biggest news in markets ​and finance seven days a week.

A playbook appears to have developed over the five months of the Iran war where each new escalation quickly deescalates into another round of talking. But markets may be a bit blasé this time around, as the threat by Yemen’s Houthi militia to block Saudi shipping potentially opens a new front in the conflict.

Regardless, ​the dip in crude prices below $90/bbl on Monday was enough to spark a decent rally in Asia stocks, with Tokyo and Seoul stocks ⁠up ⁠briskly on Tuesday and U.S. futures in ⁠positive territory too. Eyes are ​more likely trained on the big tech earnings about to hit the Street, as Alphabet is due to report on Wednesday.

Otherwise the focus ​this morning was Donald Trump’s new tariff ⁠salvo against Canada and new British Prime Minister Andy Burnham’s surprise pick for finance minister. Trump re-opened regional trade wars by saying he would apply 50% tariffs against some $20 billion of Canadian imports next month, goods such as wine, cement and clothes that account for some 5% of Canadian exports south of the border. Canadian PM Mark Carney said he would double down on negotiations to resolve the issue.