The return of public debt fears in rich countries

When Norway's sovereign wealth fund changes its investment strategy, the financial world listens intently—especially when it announces it is drastically reducing its holdings of U.S. government bonds. According to Reuters calculations, the move would mean selling nearly $80 billion in U.S. securities, down from about $215 billion at the end of June.

More and more investors around the world are watching the United States' uncontrolled borrowing with concern. This has become especially evident since the US national debt exceeded the $40 trillion mark in August, and the interest rate on 30-year US Treasury bonds jumped to 5,3 percent, the highest level since 2007.

This has brought fear back to the capital markets – fear that government debt in the US and other developed countries will become a serious problem.

For highly indebted countries like Japan, whose debt is more than 200 percent of gross domestic product, borrowing money on capital markets is becoming increasingly expensive. The same is true for France and the United Kingdom.

Germany is doing much better for now. With public debt of around 65 percent of GDP, the debt ratio is half that of the US.

However, due to borrowing to modernize the Bundeswehr and infrastructure, it will move towards 80 percent in the coming years. In August, interest rates on ten-year German government bonds rose to more than 3,3 percent at one point, the highest level of foreign interest rates in about fifteen years.

USA: more than 3 billion per day in interest

The US now spends over a trillion US dollars a year just on interest payments on its national debt, which is more than three billion dollars a day, according to calculations by the Congressional Budget Office (CBO).

Since 2024, Washington has been spending more money on interest than on its entire military. France and Great Britain face the same problem.

According to calculations by the Federal Reserve Bank of St. Louis, the US national debt has grown by more than 600 percent over the past 30 years: from $5,2 trillion in 1996 to more than $40 trillion today. The total debt, at more than 125 percent of GDP, is at a similar level to that of Italy or France.

The US budget deficit will amount to almost six percent of economic output this year, while Treasury Secretary Scott Besant initially wanted to lower the deficit to three percent.

This is completely unrealistic given the current situation: the state treasury is lacking revenue from the penalty tariffs that were abolished by the Supreme Court, on top of which there are huge costs for the war in Iran, as well as a shortage of money due to tax breaks for businesses.

This course is unsustainable.

"This is a very dangerous path," said Karsten Remheld, capital markets strategist at Fidelity International, in an interview with DW.

"Nervousness is growing very noticeably within the American administration. That is quite clearly visible. If this continues, this course is unsustainable."

This is especially evident when you look at the speed at which the US debt is growing. During the 2008 financial crisis, the ten trillion dollar mark was exceeded, and in 2017 the threshold of 20 trillion was reached. By early 2022, the debt was already 30 trillion, and it took Americans only four and a half years to reach the next negative record of 40 trillion dollars in the summer of 2026.

"The era of cheap money is over"

US Treasury Secretary Scott Besant therefore resorted to extraordinary measures to lower interest rates on US bonds.

Starting September 9, it plans to double its purchases of long-term government bonds from the current $2 billion to at least $4 billion. This should be financed by issuing new short-term Treasury bills (T-Bills).

"This measure is, of course, too modest in itself to keep interest rates under control permanently," says Karsten Remheld. Investors have become skeptical and are carefully analyzing the figures.

“The bond market now demands financial discipline,” the Financial Times quotes Kim Crawford, global bond market manager at JPMorgan Asset Management.

However, that discipline is nowhere in sight: neither in the US, Japan, France nor Germany are there any indications that the governments there seriously intend to implement austerity measures.

Despite everything, America will not go bankrupt

Despite all the problems, investors cannot currently bypass the US – most economists agree on that.

"The European capital market is not yet an alternative to the American one," said Karsten Brzeski, chief economist at ING Bank, in an interview with DW. "China and other fast-growing economies are not able or willing to take over that role from America. That's why I think investors - although they are currently afraid of higher inflation and the sustainability of the US national debt - are not turning away from the US. At least not while the US economy is growing."

Karsten Remheld also sees no immediate danger of US bankruptcy.

"Of course, America is not insolvent, because it can simply print its own money if it wants to. But this kind of policy will shake confidence. This will be reflected in the dollar exchange rate, which will weaken when international investors are less willing to finance the US," says Remheld.

However, regardless of how long the US war against Iran – which is causing high military spending and a surge in energy prices – lasts – many things indicate that the US will permanently have to pay higher interest rates on the capital market.

Investments in (American) artificial intelligence

This, according to Robert Sokin, chief US economist at asset management firm PGIM, also lies in “corporate bonds linked to artificial intelligence (AI), which are increasingly crowding out Treasury bills.”

Karsten Remheld also confirms that large technology concerns, which massively issue bonds to finance their billion-dollar investments in AI infrastructure, represent direct competition to the state.

"Just four large so-called hyperscalers, or companies that produce platforms for the AI ​​industry in the US, have already taken on over $800 billion in debt this year, with a tendency for further growth in the next two years."

When, in addition to all this, technology giants offer higher interest rates, many investors change strategy.

"If, as an investor, I have been putting US government bonds in my portfolio as collateral, the prospects of which have deteriorated in recent years, and now I am getting long-term bonds from top companies like Alphabet or Microsoft on the market - and with an interest rate that is 100 basis points higher than government bonds - then that is absolute competition," concludes Remheld.

This is competition that no US Treasury Secretary could have counted on two or three years ago.