The global economy is facing a formidable challenge in 2025. With total global debt now exceeding $323 trillion—over 3.3 times the global GDP—the financial world faces a systemic risk that is neither distant nor hypothetical. The escalating burden threatens fiscal and monetary stability, demanding urgent and coordinated regulatory action.
The United States is grappling with a mounting debt crisis, with government debt surpassing $34 trillion and annual interest payments projected to exceed $1 trillion by 2028. The Federal Reserve’s monetary tightening has worsened the situation, pushing borrowing costs higher and raising the spectre of a debt spiral.
In the Eurozone, rising deficits and unsustainable debt burdens continue to impede growth, while China’s debt-to-GDP ratio has surged past 330%. Despite liquidity injections from the People’s Bank of China, the property sector remains mired in crisis, shadow banking is under strain, and growth forecasts have slowed to 4.5%—a worrying trend for the global economy.
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India’s growth imperative amid economic strains
India, often regarded as a growth engine, is not immune to these pressures. The GDP growth has decelerated to 5.4%, inadequate to meet the aspirations of its burgeoning population. Structural issues such as high unemployment and middle-class stagnation pose additional challenges. To meet its developmental goals, India needs sustained annual growth of 8%, yet achieving this target seems increasingly difficult in the current global environment.
The convergence of rising debt levels, tightening monetary policies, and geopolitical uncertainties has created an increasingly fragile economic ecosystem. Governments accustomed to low-cost borrowing now face soaring debt-servicing costs, limiting their ability to address fiscal priorities. Meanwhile, corporate borrowers with high leverage are grappling with refinancing difficulties, raising the risk of defaults. These strains are evident in widening credit spreads and surging bond yields, with sovereign and corporate credit markets bearing the brunt of uncertainty.
The notion that central banks can simply inject liquidity to resolve these issues is a dangerous fallacy. While excessive liquidity might temporarily alleviate debt pressures, it risks fuelling inflation, eroding currency confidence, and destabilising global capital flows. Policymakers must prioritise long-term financial stability over short-term monetary interventions, resisting the temptation to rely on unsustainable quick fixes.
Role of geopolitics in financial instability
Geopolitical developments have only compounded these challenges. The resurgence of protectionist policies, particularly under President Trump’s administration, threatens to disrupt global trade flows and supply chains. Emerging market economies, heavily reliant on exports, face rising borrowing costs and mounting external debt. Climate change further exacerbates financial strain through infrastructure damage, supply chain disruptions, and increasing insurance costs.
To mitigate these systemic risks, regulators must act decisively. Strengthening the capital buffers of financial institutions is imperative to safeguard against potential defaults and liquidity crises. Stress tests should be recalibrated to reflect worst-case scenarios, including sudden interest rate hikes, sovereign defaults, and significant asset value declines. Transparency must be prioritised to provide clear visibility into debt positions, particularly in shadow banking and off-balance-sheet liabilities. Improved disclosures across global markets are essential to ensure accurate risk assessments and prevent crises triggered by hidden vulnerabilities.
Regulators must also develop frameworks for orderly debt restructuring. The lessons of the 2008 financial crisis highlight the importance of contingency plans to manage large-scale defaults effectively. Mechanisms to limit contagion are crucial to prevent isolated defaults from snowballing into global financial crises. For emerging markets, coordinated actions such as debt relief and liquidity support mechanisms should be considered to address vulnerabilities stemming from rising dollar-denominated debt and declining currencies.
Global debt: International coordination an imperative
The interconnected nature of the financial system demands global coordination. Regulatory arbitrage, where institutions exploit jurisdictional differences, must be curtailed. Institutions like the Financial Stability Board must foster alignment among regulators to avoid fragmented responses that exacerbate risks. Similarly, integrating climate risks into regulatory frameworks is critical. Climate-related disruptions—whether physical risks from extreme weather or transition risks from the shift to a low-carbon economy—pose significant challenges to financial stability. Regulators must ensure these risks are adequately priced into both public and private sector debt.
Central banks face the delicate task of curbing inflation without stifling growth. Aggressive monetary tightening risks plunging economies into recession, particularly in highly indebted nations where rising interest rates exacerbate fiscal pressures. Striking this balance is essential to avoid stagnation or deflation, which could inflict long-term damage.
The escalating global debt crisis demands urgent, coordinated action. Financial regulators must address systemic vulnerabilities with foresight, ensuring institutions are robustly capitalised and transparent. Proactive strategies, aligned policies, and a readiness to manage worst-case scenarios will be crucial in safeguarding global economic stability. The decisions made today will determine whether the global financial system withstands this crisis or succumbs to its pressures.