Implications for Businesses of High Sovereign Debt Levels in Advanced Economies
October 2025
*For this article we utilize the term “advanced economies” to describe countries that would colloquially be understood as the Global North (i.e. the U.S., Canada, most of Europe, Japan, South Korea, Australia, and New Zealand), as well as China.
Introduction
Global sovereign debt has risen to levels unseen outside of wartime. Advanced economies now average debt-to-GDP ratios above 100%, compared to 50-60% in the 1970s.1 The drivers of this shift are structural and political: aging populations swell entitlement expenses, the remilitarization of the world, transition to green energy, building out of AI infrastructure, and populist politics limiting fiscal discipline. Currently, there exists no certainty that major economies will grow out of or undertake the necessary fiscal responsibility to reduce their debt burdens. These trends represent a sea change in global macroeconomic realities, heavily impact central bank policies, and are crucially upstream of business financial conditions and forecasts. Business leaders must grasp the impact of sovereign debt on their companies finances, operations, and long-term strategy.
Historical Context
Case studies from recent history provide a high-level understanding of the choices facing advanced economies today, and the implications of those choices:
Post-WWII United States
In 1946, U.S. debt surpassed 100% of GDP – slightly below today’s level. Yet over the following three decades, through fiscal discipline, rapid and sustained growth, and moderate inflation, that ratio was reduced to 23% of GDP by 1974.2 Crucially, this fiscal stability provided the U.S. the capacity to build a rules-based global economic order. Through initiatives such as the Marshall Plan and the Bretton Woods system, the dollar emerged as the world’s reserve currency, anchoring global trade and finance. For businesses, this meant predictable financing conditions, reduced currency risk, and expanding access to global markets. U.S. corporations thrived in an environment defined by stable government finances, steady tax and spending policy, and a strong dollar that provided the foundation for cross-border investment and lending.
The U.K. Gilt Crisis of 2022
Liz Truss’s government’s unfunded tax cuts during a period of high inflation and tightening monetary policy provide an example of market reactions to ill-managed sovereign debt. As a result of these policies, markets panicked, gilt yields spiked, liquidity vanished, and pension funds relying on leveraged positions were forced to sell into rising interest rates.3 The Bank of England intervened in the crisis to prevent systemic collapse, and fiscal policy was quickly reversed. The episode highlights that businesses are exposed to sovereign missteps: pension funds faced a liquidity drain, financing positions quickly tightened, and corporate tax policy reversed twice within weeks.
Eurozone Debt Crisis (2010-2015)
Southern European economies, burdened with high debt levels following the global financial crisis, faced soaring borrowing costs. To secure bailouts, governments imposed austerity measures including tax hikes, spending cuts, and labor reforms.4 While aimed at fiscal stability, these measures depressed domestic demand, created policy uncertainty, and reshaped the corporate operating environment. Multinationals in Greece, Spain, and Italy saw consumer demand drop sharply and faced sudden regulatory shifts as governments scrambled for revenues to service their unsustainable debt levels. For business, sovereign debt crises hurt both the supply side (via increased financing costs)5 and the demand side (via reduced consumer spending), all while creating a volatile and uncertain policy environment.
Together, these three case studies illustrate how sovereign debt trajectories and management shape the modern business landscapes in countries, regions, and the global market. Responsible fiscal management can underwrite periods of growth and abundant opportunities for businesses and citizens alike, while mismanagement can trigger compounding crises and lengthy economic drags. Much like these three examples, today’s elevated debt levels in the world’s most advanced economies have implications of their own.
Drivers of Rising Sovereign Debt Levels
The consistent trend of rising levels of sovereign debt across advanced economies can be attributed to four key pillars: aging populations, the remilitarization of the world, infrastructure needs, and populist politics.
- Aging populations are straining the fiscal situation of advanced economies through increased expenditures on retirement and healthcare entitlements. For example, in 1970 the United States, the percentage of the population ages 65 and above was roughly 10%–in 2024, that number was 18%.6 In that same time, Social Security and Medicare spending went from roughly 17.7% of the U.S. federal budget to 44%.7
- The remilitarization of the world has been brought on by heightened geopolitical tensions, fracturing global alliances, and balance-of-power shifts. Spending on military and defense programs rose to $2.72 trillion globally in 2024, a 9.4% increase from the year prior, and the largest year-over-year increase since 1988.8 Primarily, Europe and Asia are driving this trend. Japan, South Korea, and India’s budgets all recorded record defense spending in the range of $50b-$80b annually.9,10,11 In Europe, defense expenditures reached $402b, up 19% year-over-year.12
- Infrastructure investment needs across transportation, green energy, industrial bases, and water are vast for the United States, China, and all OECD nations. What was already an expensive and critical spending category for advanced economies has seen a capacity requirement explosion given the massive amounts of physical build-out to provide the water, energy, and raw materials to build the data centers fueling cutting out AI models. For example, in the United States the 2021 Infrastructure Investment Jobs Act alone authorized around $2.1 trillion in infrastructure spending over 2022-2026, placing significant upward pressure on public borrowing and deficits.13
- Populism is rife globally. 57% of citizens feel their country is in decline, and 47% feel that they need a strong leader willing to break the rules.14 This political culture makes the necessary adjustments to curb spending or raise revenues in order to reduce sovereign debt levels extremely politically difficult. In democratic nations, and even those with authoritarian leaders who are semi-responsive to the consent of the governed, this populistic undertone underwrites the decisions to continue deficit spending and increase debt burdens.
Possible Outcomes
In order to draw conclusions about the implications of high sovereign debt levels for businesses in advanced economies, we must first understand what the potential outcomes of such debt levels are for nations.
Bear Case:
- Sharp increase in sovereign yield as markets lose confidence about debt sustainability (like Eurozone periphery in 2010s).
- Wave of credit downgrades, fiscal crises, and in extreme cases sovereign defaults or forced restructurings.
- Governments resort to austerity measures: spending cuts and tax hits that curb growth and consumer demand.
- Corporates face higher borrowing costs tied to the sovereign risk premiums; investment and hiring decrease.
- Political instability rises, polarization, populism, and protests against austerity deepen the flywheel of uncertainty, unrest, and economic hardship.
Base Case:
- Governments stabilize debt through a mix of low growth, modest inflation, and politically digestible tax increases and spending cuts.
- Central banks keep real rates mildly positive as they avoid triggering shock crises. Interest costs stay moderately high but not restrictive.
- Debt ratios plateau at elevated levels (100%-130% of GDP in many economies), constraining space for new priorities, investment, or resilience to shocks including but not limited to pandemics, war, and recessions.
- Growth is consistently below potential due to crowding-out and lower fiscal flexibility.
Bull Case:
- Governments implement foundational fiscal reforms (pension adjustments, tax modernization, productivity-oriented investment).
- Debt ratios gradually decline as growth – interest stays positive, budgets balance, moderate inflation erodes portions of debt burden, and productivity boosts the economy.
- Structural tailwinds including AI-driven productivity boost growth and revenues.
- Debt burden remains high in nominal terms, but economies grow out of the substantial debt burden providing flexibility in fiscal responsiveness and opportunity for allocation of government capital to new priorities.
Implications for Businesses & Business Guidance
In an era of fiscal uncertainty, and in some cases recklessness, companies cannot solely rely on governments to provide a backdrop of economic stability. Business operators in countries like Greece and Argentina inherently understand this, but cases of similar threat are no longer out of the question amongst the rising sovereign debt levels of advanced economies. These elevated debt levels, combined with volatile policy swings and constrained fiscal maneuverability, mean that corporates must adopt financial and operational postures more disciplined than those of the sovereigns under which they operate.
The most resilient firms will create balance sheets with embedded margins of safety, maintaining prudent leverage, ample liquidity, and diversified funding sources to weather sudden swings in interest rates, sovereign risk premiums, or capital market dislocations. Where governments face limited fiscal flexibility amongst their high levels of debt, companies can create their own by holding cash reserves, reducing dependency on short-term financing, and lengthening maturities where possible. Larger corporations including the large banks and multinationals were previously more required than their smaller contemporaries to understand the implications and importance of global macroeconomics and fiscal trades, but given the fracturing international order, broad-based increases in debt burdens on nations, and accelerating rates of change in technology and energy – these forces touch every business, now more than anytime since WWII.
Operationally, businesses must prioritize flexibility and resilience. This means building adaptive capital allocation frameworks, stress-testing business models against macroeconomic shocks, and ensuring supply chains can withstand both financial and geopolitical disruptions. In practice, corporates that can quickly deploy capital with confidence, absorb shocks, and restructure operations will strive in the volatile swings of global economies brought on by fiscal uncertainty.
Equally as important is cultivating an antifragile company. In the event that sovereigns govern responsibility and lower their debt burdens, antifragile companies—those with systems and strategies that do not merely withstand shocks but benefit from them–will be positioned to better ride the wave of fiscal responsibility underwriting their financing and the economies in which they operate. These advantages can manifest in acquiring distressed competitors, pivoting toward new regulatory regimes, or investing while others are fearful.
Lastly, firms must be macro-economically literate in today’s global fiscal and geopolitical environment. Just as global macro-investors closely track sovereign credit rates, interest rate expectations, and policies, corporate leaders must integrate macroeconomic analysis into strategic decision-making. Awareness of demographic and policy shifts, fiscal sustainability trajectories, monetary policy pivots, and political trends in each operating market is a paramount factor for long-term business success.
When sovereign nations are fiscally undisciplined, corporations must be the opposite: disciplined, flexible, resilient, and antifragile.
Sources:
7 Financial Report of Government 2024
8 Stockholm International Peace Research Institute
10 DefenseNews
13 American Society of Civil Engineers
14 Ipsos
