The world economy’s debt pile hit a fresh high in the first half of this year, while borrowing as a share of gross domestic product is rising again after nearly two years of declines, according to the Institute of International Finance.

Total debt — spanning sovereigns, corporates, and households — rose by $10tn to about $307tn in the six months to June, the IIF said in its global debt monitor report published on Tuesday. The previous peak for global debt was in early 2022, before central banks started aggressively raising interest rates.

Global debt as a share of GDP, which had been falling due to high inflation, rose to 336 per cent by June this year, a 2 percentage point rise since the start of the year. But it remains below a peak of about 360 per cent hit during the coronavirus pandemic. 

The rise in debt comes as higher interest rates in most countries push up borrowing costs — a crucial determinant of sovereign credit ratings. It also comes as financing the climate transition puts pressure on governments to boost spending.

“Our concern is that countries will have to allocate more and more to interest expenses,” said Emre Tiftik, the lead author of the IIF’s report. “It will have long-term implications for countries’ funding costs and debt dynamics.”

The IIF said that more than 80 per cent of the additional debt in the first half of the year came from mature markets, with the US, Japan, UK, and France registering the largest increases. 

“Rising interest bills are a key risk to public finances and sovereign ratings, particularly in developed markets,” said Edward Parker, managing director at Fitch Ratings, the credit rating agency that downgraded the US earlier this year. 

Developed markets’ interest bill was flat in nominal terms between 2007 and 2021, despite rising debt levels. “But that free lunch is over and interest payments are now rising faster than debt or revenue,” Parker said.

Debt interest costs are expected to keep rising as more debt is refinanced and interest rates stay higher to fight inflation, according to the report. On Tuesday, the OECD warned that central banks should keep interest rates at high levels or raise them further to defeat inflation despite growing signs of economic strain. 

The IIF said it was particularly concerned about a rise in interest expenses for local currency emerging market debt, which now makes up more than 80 per cent of emerging markets’ total interest costs.

It warned that as more countries are forced to restructure their debt, the high level of domestic debt leaves them vulnerable because the IMF’s debt restructuring programme is more geared towards external creditors such as investment funds and other sovereigns and foreign currency debt. 

“The traditional tools that we have are largely designed to address external debt vulnerabilities, leaving emerging markets in the middle of the vicious cycle of debt and inflation at the cost of a sharp decline in potential growth,” said Tiftik.

The report follows a warning from the IMF last week that governments “should take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends”. 

“Reducing debt burdens will create fiscal space and allow new investments, helping foster economic growth in coming years,” the IMF said.