It reveals many a truths, including for those who were the traditional high priests of fiscal prudence and debt survivability.

OECD, known as the rich-man’s club, has revealed that the highly developed countries of Europe have shown a persistent trend of spending more on paying interest on their outstanding debts than their annual defence budgets. In no uncertain manner this underlines what the Americans had rather brutally pointed out to them their inability to spend on defending themselves and counting on America to protect them against hostile aggression.

This economic indicator singlehandedly explain how helpless the Europeans are in the face of an aggressive Russia at its doorstep when America has refused to meet their bills for defending themselves.

Nonetheless, the habits of reading out sermons to others die hard. OECD report examines the debt profile of developed countries as well as the so-called emerging economies and developing countries as well. The developed countries are showing very high debt to gross domestic product (GDP) ratios following the pandemic and the artificial stimuli these countries had organised to bolster their economies.

The OECD report is emphatic in its recommendations that the latter group of countries, namely, emerging economies and developing countries, should be particularly careful about fiscal prudence and maintaining low debt GDP ratios.

Anyway, taking stock of the public debt profiles of the two groups of countries also reveal the spectacular differences in debt profiles of the emerging markets and developing economies and the developed countries.

Sovereign debts issued in OECD countries is projected by the OECD study to reach a record $17 trillion in 2025, up from $14 trillion in 2023. Emerging markets and developing economies' (EMDE) figures from debt markets has also grown significantly, but puny compared to the rich countries, from around $1 trillion in 2007 to over $3 trillion in 2024.

One aspect of government debt is little appreciated generally. This is that government debts are scarcely wiped out through repayment. These are merely recycles, that is, old maturing debts are repaid by borrowing afresh. So what matters is how you are replacing the old debts.

In case, the interest rates are on the upswing, fresh debts would have be contracted at higher rates of interest and thus, most critically, the overall costs of borrowings go up because of higher interest burden. On an interest rate downswing, these refinancing costs tend to fall.

The global financial markets are currently agog with Trump tantrums. The wild statements and swings in US policies over trade and economic policies are sending confusing signals. There is widespread swings in the stock markets and movement of investor money from stocks to bonds. Economic recession is predicted for the United States and even trump himself have admitted to such a possibility.

Any talk of recession and a movement of investor money from stocks to bonds results in fall in interest rates subsequently. Rumours are doing the rounds that the US would be faced with loans maturing to the tune of $7 trillion. This is no small change. A minor clip in the interest rates in the forthcoming days could help the US federal government to save on interest costs of their humongous outstanding debts recycling. Hence, the Trump tantrums were ways of helping achieve this goal of lower interest burden on debt recycling.

Anyway, be that as it may, the world is facing a possible Herculean task in debt restructuring. “Looking ahead, 42% of total sovereign debt and 38% of all outstanding corporate bond debt is set to mature in the next three years”, the OECD report calculates.

The report points out that refinance costs for the OECD countries have increased by 0.3% of GDP in 2024 compared with the previous year pushing up overall inert pay-out to GDP ratio to over 3.3% of GDP. This is at least a percentage higher than they spend on defence. With American new strategic stance, it will be imperative for these countries to reverse this trend.

An extremely critical factor in debt sustainability is the exposure of a country’s public debt to foreign investors. They larger is the exposure to foreign holders, the higher is the vulnerability. Here also the trends are disturbing.

The overall shift in the profile of buyers of government bonds from domestic sources to foreign institutional investors and other elevate the risk of eternal payments problems.

In OECD countries, central bank holdings of domestic sovereign bonds fell from 29% of total outstanding debt in 2021 to 19% in 2024, while domestic households’ share grew from 5% to 11%, and that of foreign investors from 29% to 34%, the OECD report reveals.

Let us take a look at the debt profiles of India and our vulnerability to external shocks. The latest article 4 consultations by the International Monetary Fund of the India economy gives insights into some of the related aspects. External debt as a percentage of GDP remains at 18.9% and this is slated to go down to 18.6% in 2025-26. Of this short term debt is only 8.3% which is taken as a measure of vulnerability because that indicates the immediate repayments burden.

Overall, the debt profile is improving over the years because of the continuing emphasis on fiscal consolidation and the reaching a balance in government finances. Admittedly, the buoyant state of the economy —an indication of which is the shooting tax collections— has helped achieve these goals. After all, a rising tide raises all boats, government as well as the individual. (IPA Service)