Michal Katz, Head of Investment & Corporate Banking at Mizuho Americas, recapped her discussion from FII Institute Priority Summit in Miami. In this article, she examines whether the global debt levels constitute a crisis or a manageable surge. While she does not believe the crisis is at our doorstep, she contends that the current path of the U.S. debt-to-GDP is unsustainable. Read below to understand the implications, levers and a path forward that would encourage a private - public solution.
The full video of the FII panel can be viewed at the bottom of the page.
Global Debt Levels: A Crisis or Manageable Surge?
This question was posed by Manus Cranny co-anchor, Bloomberg Brief as the moderator of the panel “Will Markets Survive the $100 Trillion Debt Crisis” at the FII Priority – Invest with Purpose conference last month in Miami. My fellow panelists, Anne Walsh, CIO, Guggenheim Partners Investment Management, and Angel Ubide, Head of Economic Research for Global Fixed Income & Macro, Citadel, and I offered our views. While we do not believe a crisis is at our doorstep, we do believe the debt-to-GDP trajectory is on an unsustainable path and needs to be addressed.
Parsing through the headlines
The $100 trillion global debt number is ominous on its face, but its makeup is more nuanced. First, not all debt is created equal. Three countries – the U.S., China and Japan – contribute 60% of the total. Some countries are more likely to default on their sovereign debt, yet the risk of contagion is confined. Whereas the U.S., despite a looming $36 trillion debt load, is unlikely to default, such an event would send shock waves throughout the global economy. Second, and perhaps most importantly, there is a global excess supply of savings with plenty of capital ready to be deployed, with the risk of a funding crisis essentially removed.
To be sure, U.S. debt-to-GDP is roughly triple what it was in 2001 after a war, the global financial crisis and a pandemic that pushed the government to increase spending. U.S. debt constitutes roughly 120% of GDP as of the fourth quarter of 2024. Last year was also when, for the first time ever, interest payments on the debt exceeded that of the defense budget. Yet, the U.S.’s current standing as a destination of choice for capital markets and investment seems to offset debt crisis concerns for the world’s largest economy.
Although we’ve seen some mixed headlines of late, the U.S. economy remains on a strong footing with robust corporate and consumer balance sheets, low unemployment, constructive capital markets and it is supported by a largely pro-business, pro-growth administration. And, the dollar remains the reserve currency, with no strong contenders on the horizon.
So what’s the trouble?
Despite the low default risk, there are concerns of great consequence, namely opportunity cost, higher rates and crowding out of the private sector. Instead of spending money on servicing the debt, we could be allocating capital to pro-growth projects. What’s more, with policy shifts around the globe including pledges of increased defense spending by the European Union, especially Germany, there is some disquiet around the continuity of American exceptionalism. Could this be the grey swan event that causes a reallocation of capital from the U.S. to other parts of the globe? That could be a catalyst for higher U.S. interest rates which would hamper economic growth, making it more expensive for corporates to borrow. It would also inhibit broader capital markets and M&A activity. It is a familiar story that has very recently played out in the U.S. during the fastest Fed rate hike in history.
The news can reflect the worst of what’s happening in the world and headlines over the past few weeks certainly confirm that. They’ve created global stock and bond market gyrations and general unease across the board with the implications of an ever-changing trade and tariff policy at the center. This backdrop ostensibly raises the stakes and calls into question whether we need to be prudent and address the matter at hand sooner rather than later.
Where do we go from here?
U.S. Treasury Secretary Scott Bessent has stated that the country needs to cut its deficit to 3% of GDP to stabilize the debt. There are two primary levers to pull: increase revenues or cut expenses. As one of my fellow panelists said, the U.S. government can’t get to debt service parity merely by cutting, it also needs to encourage growth. But the government shouldn’t go at it alone. Instead, it can embolden the private sector to lead the change by way of incentives and public private partnerships. After all, spending, and by extension debt, is not necessarily a bad thing so long as there is a favorable return on investment.
Transformation awaits
President Trump spoke at FII and reiterated the platform policies he ran on: growth and investment in the U.S. He touted SoftBank’s billions of dollars in investment in the U.S. and 100,000 new jobs, Japan’s promise of a trillion dollars’ worth of U.S. investment and, two weeks later, announced that semiconductor firm TSMC would invest $100 billion in the U.S. for chip manufacturing. Technologies such as AI, space and industrial tech are critical for future growth. The wheels in the infrastructure, energy and technology sectors are already spinning, including Project Stargate and the sprawling data center build out to support opportunities in generative AI. Though yet to be implemented, pro-business policies (lower taxes, de-regulation) are also expected to support these initiatives.
All of this needs to be paired with governmental expense discipline and productivity enhancements. The recent Department of Government Efficiency’s (DOGE) push to streamline operations is a start but we need to see how policies are implemented and subsequent results. While DOGE is responsible for cost-cutting it has contributed to the highest number of monthly layoffs since the peak of the 2020 pandemic. This is something to keep an eye on lest it create a kink in the policies set out to fuel economic growth.
The corporate playbook
Meanwhile, corporates are taking a beat, watching and trying to digest these dynamics. With initiatives still in an early stage and with a fog of uncertainty around global trade as a backdrop, there is a wide distribution of outcomes that business leaders are facing. To grapple with the 24-hour news cycle religiously pumping out line after line of doubt, we’ve seen clients conduct more scenario planning, actively pursue refinancing well ahead of maturity dates and consider interest rate hedging and credit insurance as protection.
Conclusion
The current global debt trajectory is on an unsustainable path. While the U.S. has served as a bastion due to its scale, depth and breadth of capital markets, the world economic order is undergoing a transformation. History shows that the paranoid tend to survive. While not currently a crisis, it is best to get our own house in order.
Michelle Carroll, COO strategic planning at Mizuho Americas, contributed to this article.
Watch the panel discussion below: