The Global Interest Payment Crisis: Why Governments Are Spending More Servicing Debt Than Building Infrastructure

The United States government is spending $88 billion a month on interest payments — roughly equal to what it spends on national defense and education combined. For the full fiscal year 2026, the Congressional Budget Office projects that interest on the federal debt will reach $1.0 trillion, making it the second-largest line item in the federal budget, behind only Social Security. It now exceeds both defense spending and Medicare.

But this is not merely an American problem. Across the OECD, interest expenditures have reached 3.3% of GDP — near the ten-year peak of 3.4%. In developing countries, the picture is far worse: Sri Lanka devoted 78% of its government revenue to interest payments in 2022. Ghana devoted 47%. Egypt devoted 42%. These are not percentages of GDP — they are percentages of revenue. For every dollar these governments collect in taxes, nearly half goes to creditors before a single road is paved, a single teacher paid, or a single hospital supplied.

Global public debt has reached a record $102 trillion. The question that matters now is not how large the debt is but how much it costs to service — and who bears that cost. In 2026, three simultaneous forces are driving interest payments higher: the Federal Reserve holding rates at 3.50–3.75%, the ECB hiking rates for the first time since 2023, and an emerging-market maturity wall that will force $12.1 trillion in bonds to be refinanced at rates far higher than when they were issued.

The United States: A Trillion Dollars in Interest, and Rising

The scale of America's interest bill defies intuition. At $1.0 trillion in fiscal year 2026, the federal government's interest payments are larger than the entire GDP of Saudi Arabia, Switzerland, or Taiwan. The US now spends more servicing its debt than it spends defending its borders, operating its military, and funding Medicare — the health insurance programme that covers 67 million Americans.

This crossed an important threshold in fiscal year 2024, when interest payments first exceeded defense spending. By FY 2026, the gap has widened: $1.0 trillion in interest versus $885 billion for defense. The CBO projects it will double to $2.1 trillion by 2036, growing faster than any other category of federal expenditure over the next decade. By 2048, interest is projected to become the single largest line item in the entire federal budget, surpassing even Social Security.

The driver is mechanical. With the Federal Reserve holding rates at 3.50–3.75% and inflation running above the 2% target, every Treasury bond that matures is refinanced at today's rates rather than the near-zero rates at which much of the post-2020 debt was issued. The average interest rate on the federal debt has been climbing steadily, and the Congressional Budget Office projects it will continue to rise as the older, cheaper debt rolls off. This is not a crisis that requires anything to go wrong; it is the mathematical result of existing commitments at current interest rates.

The fiscal trajectory is stark. US debt held by the public stands at 101% of GDP — the highest level since the Second World War. The CBO projects it will reach 120% by 2036 and 175% by 2056. Net federal debt is growing by approximately $7.2 billion per day. Even in the most optimistic scenario, where the post-Hormuz peace dividend pushes oil prices down and inflation moderates enough for the Fed to cut rates, the trajectory of interest payments is upward. The structural deficit — the gap between what the government spends and what it collects, even in good economic times — ensures it.

Europe: The ECB Hike That Made Everyone's Debt More Expensive

On June 17, the European Central Bank raised its deposit rate to 2.25% — the first increase since 2023 — responding to eurozone inflation hitting 3.0%. The decision was, in isolation, conventional monetary policy: prices are rising too fast, so you raise the price of money to slow them down. But in an economy where the largest member state has debt exceeding 138% of GDP, every basis point of rate increase carries a fiscal price.

Italy is the most exposed. With a debt-to-GDP ratio of 138.6% — it has now overtaken Greece as the eurozone's most indebted member — every ECB rate hike increases the cost of refinancing maturing bonds. The BTP-Bund spread, the closely watched gap between Italian and German government bond yields that serves as a barometer of sovereign risk, had compressed to 59 basis points in January 2026. It has since widened as the ECB tightened. If it moves beyond 200–250 basis points, the risk of a replay of the 2011–2012 sovereign debt crisis becomes material.

The broader picture across the OECD is concerning. Interest expenditures have reached 3.3% of aggregate GDP, close to the previous decade's peak. For larger issuers like Japan and Italy, inflation had been a net positive for debt dynamics during 2022–2023, eroding the real value of existing debt by more than 5 percentage points. But as inflation moderates and interest rates stay elevated, that dynamic has reversed. The OECD's March 2026 Global Debt Report concluded that the impact of higher interest payments is now set to outweigh the beneficial impact of falling inflation on the aggregate debt-to-GDP ratio. In plain language: the cost of the debt is growing faster than inflation is shrinking it.

Japan presents the most extreme case. At 204% of GDP, its government debt is the highest of any major economy. For decades, Japan managed this burden because the Bank of Japan kept rates at or near zero, meaning the interest cost of even enormous nominal debt was manageable. That era is ending. The BOJ has raised rates to 0.75% — modest by global standards but transformative for a country where decades of fiscal policy were built on the assumption of zero-cost borrowing. Even small rate increases, applied to a debt stock that exceeds $8 trillion, produce very large absolute increases in interest expenditure. Japan is already spending more on interest than it does on defence, education, and science combined. If the BOJ continues to normalise — with another hike expected on July 31 — the fiscal mathematics become progressively harder.

The Developing World: When Interest Eats Half Your Revenue

The interest burden in advanced economies is costly but, in most cases, manageable. The US devotes roughly 14% of federal revenue to interest; painful, but it still has fiscal room for defence, healthcare, and infrastructure. The story in the developing world is categorically different.

Sri Lanka, which defaulted on its external debt in 2022, was devoting 78% of government revenue to interest payments before restructuring began. Consider what that means operationally: for every $100 in tax collected, $78 went to creditors — leaving $22 for everything else: salaries, hospitals, schools, police, roads, pensions. Governance at that ratio is not governance; it is receivership.

Sri Lanka is an extreme case, but the pattern is widespread. Ghana sends 47 cents of every revenue dollar to creditors. Zambia, still recovering from its own 2020 default, sends 44 cents. Egypt sends 42 cents, an especially damaging ratio given the simultaneous drop in Suez Canal revenue caused by the Middle East conflict. Pakistan sends 39 cents. At these levels, the interest burden is not a fiscal inconvenience; it is the primary obstacle to development. Countries cannot invest in the infrastructure, education, and healthcare that would generate the growth needed to reduce the debt-to-GDP ratio. The debt service crowds out the investment that is the only sustainable way out of the debt.

India offers a partial counterexample. At 34% of revenue devoted to interest, its burden is significant in absolute terms — India's central government interest bill exceeds the entire GDP of many African nations. But because the Indian economy is growing at 6.4%, the denominator (GDP, and by extension revenue) is growing fast enough to keep the ratio from worsening. This is the fundamental distinction: interest payment ratios are sustainable when growth exceeds the effective interest rate, and unsustainable when it does not. For most of the countries at the top of this table, growth is well below the rate at which their debt costs are compounding.

The Maturity Wall: $12.1 Trillion in Bonds That Need to Be Rolled Over

Debt levels tell you how much a country owes. Interest-to-revenue ratios tell you how much it costs to carry. But neither captures the timing risk that is, in 2026, the most acute threat to fiscal stability in developing economies.

Sovereign bond debt in non-OECD emerging and developing economies reached a record $12.1 trillion in 2025, equivalent to roughly 30% of their collective GDP — the highest level since before 2007. The OECD's 2026 Global Debt Report reveals the concentration of maturity dates: 24 of these economies have more than half their outstanding bond debt maturing by 2027. For low-income countries specifically, 52% of outstanding bonds will mature by 2028, and 29% by the end of 2026 alone.

This creates what fixed-income analysts call a “maturity wall” — a concentrated period in which governments must refinance large volumes of debt. The problem is not the volume itself but the price. Many of these bonds were issued during the low-rate environment of 2019–2021. They will be refinanced in 2026–2027 at rates that are, in many cases, double or triple the original coupon. For non-investment-grade sovereign issuers, secondary market yields on maturing debt regularly exceed 10%. The spread between old and new rates represents a direct increase in the government's annual interest bill — an increase that arrives all at once rather than gradually.

Fifteen of the 24 economies facing this maturity wall have credit ratings in the high-risk or lower category. Nine of them have debt-to-GDP ratios above 60%. For these countries, the maturity wall is not an abstract risk; it is a rolling fiscal event that will push interest-to-revenue ratios higher over the next 18 months, forcing choices between debt service and public expenditure that will define their development trajectories for a decade.

The Crowding-Out Spiral

Economists use the term “crowding out” to describe the mechanism by which government borrowing absorbs capital that would otherwise flow to private investment. But the more immediate form of crowding out in 2026 is simpler: governments are spending so much on interest that they have less to spend on everything else.

In the United States, the arithmetic is becoming explicit. Every dollar spent on interest is a dollar unavailable for infrastructure, research, or social programmes. The CBO projects that interest will exceed Medicare by FY 2028, surpass discretionary defence and non-defence spending by FY 2038, and become the single largest expenditure — larger than Social Security — by FY 2048. The political implications are significant: future Congresses will face a budget in which a growing share is pre-committed to creditors, leaving a shrinking share for the policy priorities that voters actually elect them to deliver.

In developing economies, the crowding out is already acute and directly visible. When Kenya or Nigeria devotes a third or more of revenue to interest, the direct consequence is fewer resources for electricity grids, teacher training, and road maintenance — the investments that drive productivity growth. This creates a feedback loop: high interest payments reduce investment, reduced investment slows growth, slower growth worsens the debt-to-GDP ratio, a worse ratio increases borrowing costs, and higher borrowing costs increase interest payments. The loop is self-reinforcing, and breaking it requires either rapid growth, debt restructuring, or external support. For most of the countries caught in it, none of these is easily available.

Why Debt-to-GDP Is Not Enough

The most commonly cited measure of fiscal sustainability is the debt-to-GDP ratio. Japan's 204% is routinely described as alarming. But Japan has never defaulted on its debt, borrows cheaply in its own currency, and has a domestic investor base that absorbs the vast majority of its issuance. Sri Lanka, by contrast, had a far lower debt-to-GDP ratio before it defaulted in 2022, but its interest-to-revenue ratio was already unsustainable.

This illustrates a point that aggregate statistics often obscure: what matters for fiscal sustainability is not how much a government owes relative to the size of its economy, but how much it costs to carry that debt relative to the revenue it can raise to service it. A country with a high debt-to-GDP ratio but low interest rates and a strong domestic investor base (Japan) is in a fundamentally different position from a country with a moderate debt-to-GDP ratio but high interest rates, a weak currency, and foreign-denominated debt (Ghana, Pakistan, Egypt). The interest-to-revenue ratio captures this distinction. The debt-to-GDP ratio does not.

For the largest economies, the interest payment trajectory is a slow-moving problem that constrains fiscal flexibility over decades. For the most vulnerable economies, it is an immediate crisis that determines whether governments can provide basic services to their citizens. In both cases, the data points in the same direction: the era of cheap government borrowing is over, the accumulated debts of the low-rate era are repricing, and the fiscal space that allowed governments to spend freely during the pandemic is contracting. The interest bill is rising, and — unlike debt itself, which can be rolled over indefinitely as long as markets cooperate — interest must be paid in real money, every quarter, without exception.

What Comes Next

Three developments over the next six months will determine whether the interest payment squeeze intensifies or moderates. First, the trajectory of central bank rates: the ECB has signalled that further hikes are possible in July, the Fed is holding but may be forced to raise rates if inflation remains above target, and the BOJ is expected to hike again on July 31. Each of these moves ripples outward, increasing borrowing costs for governments that are already stretched.

Second, the IMF's July World Economic Outlook, due around July 22, will update growth and fiscal projections for 190 countries. If growth forecasts are revised downward — as the World Bank's June GEP suggests they may be, having cut global growth to 2.5% — the debt-to-GDP ratios will worsen mechanically, and with them the markets' assessment of sovereign credit risk.

Third, the emerging-market maturity wall will continue to produce refinancing events through 2027. Each one is a moment of market judgment: will investors buy the new bonds, and at what price? For the 15 high-risk sovereigns identified by the OECD, each maturity event carries the potential for a disorderly outcome — a failed auction, a spread blowout, or a restructuring. The global recession map is already complex enough. A sovereign debt event in a vulnerable emerging economy would add a fourth type of contraction to the taxonomy.

The global interest payment crisis is not a single event. It is a structural shift. Governments borrowed heavily during the pandemic at rates that seemed impossibly low. Those rates are gone. The debt remains. And every quarter, the interest bill arrives — inexorable, compounding, and increasingly difficult to ignore.