National Debt Interest Alone Hits 3000 Trillion Won Annually... Governments Worldwide Scream Amid High Interest Rates and Inflation

Pitch "Global Sovereign Debt Interest, $2.3 Trillion Annually"
51% Increase in 3 Years
UK's Inflation-Linked Bonds Share Grows, Government Burden Surges

Due to the high-intensity tightening by major central banks, the annual interest on government bonds that each country’s government must bear has reached $2.3 trillion (approximately 2,950 trillion KRW). Analysis shows that not only households and businesses but also governments, which have raised funds by issuing massive amounts of government bonds at low interest rates in the past, are struggling with interest repayment burdens. The situation is challenging not only for economically vulnerable emerging countries but also for advanced countries such as the United States and the United Kingdom.

According to international credit rating agency Fitch on the 25th (local time), the interest cost on government bonds of countries with their own credit ratings is expected to surge 51.3%, from $1.52 trillion in 2020 to $2.3 trillion this year. This increase in interest burden is due to countries expanding their national debt under an expansionary fiscal policy after the COVID-19 pandemic, combined with the interest rate hikes that began in earnest early last year.

More than half of the interest costs are borne by advanced countries. The interest repayment amount on government bonds in advanced countries is estimated to increase 47.1%, from $870 billion in 2020 to $1.28 trillion in 2023. Emerging countries are also expected to see a sharp rise in interest burden from $650 billion to $910 billion during the same period, but the increase rate is expected to be 40%, smaller than that of advanced countries. Fitch explained, "Advanced countries have enjoyed more benefits due to lower borrowing costs," which is why "interest costs in advanced countries have increased more steeply than in emerging countries." Looking at the government bond yields of the United States and the United Kingdom, the 10-year yields were below 1% during the pandemic but have now risen to 3.9% and 4.3%, respectively.

The United States, the world’s largest issuer of government bonds, is bearing more than $51 billion per month in interest on national debt alone. As of June, the U.S. recorded $616 billion in government bond interest payments over the previous 12 months. This surpassed $500 billion for the first time in November last year and exceeded $600 billion again within seven months.

The situation in the United Kingdom is even more severe. As of May, the UK’s government bond interest payments over the previous 12 months reached ?117 billion, double that of September 2021. Interest rate hikes followed by inflation are weighing heavily on the UK government’s finances. Unlike regular bonds, inflation-linked government bonds, whose principal and interest increase with inflation, account for 25% of the UK’s total national debt. This is the highest level among the Group of Seven (G7) countries and twice that of Italy (12%), the second highest member country. Despite slowing income and consumer spending growth, energy-driven inflation has hit, placing the UK government under heavier interest repayment burdens than any previous administration.

According to the Bank for International Settlements (BIS), the outstanding amount of inflation-linked government bonds issued worldwide was $3.5 trillion as of the end of 2022, accounting for 11% of total government bond issuance. Fitch analyzed that among emerging countries, Uruguay, Chile, and Brazil have relatively high proportions of inflation-linked government bond issuance.

As the interest repayment burden of advanced countries rapidly increases, Fitch suggested that the credit rating outlook for advanced countries may be downgraded in future sovereign credit rating assessments. According to Fitch, emerging countries have three times more positive outlooks than negative ones, whereas advanced countries have five times more negative outlooks than positive ones. Fitch stated, "Since advanced countries face relatively greater interest rate stress, the current sovereign credit rating outlook is more favorable for emerging countries than for advanced countries."