How Soaring Government Debt Could Play a Starring Role in the Next Great Financial Crisis
By Barbara Shecter | Published Oct 27, 2025
Governments around the world carry heavy debt. They face rising worry about what this debt may cause. The United States, which drives the global economy, sits in a risky spot. If the U.S. runs into fiscal trouble, markets everywhere may fall hard.
The Increasing Burden of Sovereign Debt
Sovereign debt climbs fast in recent years. Pandemic costs, economic boosts, and budget gaps push the debt higher. The U.S. holds about US$37 trillion in debt. It runs a yearly deficit near US$1.8 trillion – about six percent of its GDP. Even as people like Elon Musk plead for less spending, the deficit barely slows down.
Many countries grow their debt too. Yet the United States matters more because it issues U.S. Treasury securities. These bonds support global finance. Pension funds, banks, and foreign governments all hold large amounts of them.
Troubling Signs from the Treasury Market
This year, market changes signaled trouble. After President Donald Trump set steep tariffs on over 80 countries – a day some called "Liberation Day" – investors ran from unstable stocks. They moved into U.S. Treasury bonds, and yields dropped. Soon, yields on 10-year bonds jumped from 3.9% to 4.5%. Thirty-year yields went past 5%.
When yields rise, bond prices drop. This fall shows that investors worry about U.S. debt. Mark Manger from the University of Toronto’s Munk School pointed out that this move looks like a warning seen in risky markets like Argentina or Nigeria. He said, "This is the part where observers start to freak out… because it’s not supposed to be like this."
Risks of a U.S. Debt Crisis
A drop in trust for U.S. Treasuries has huge risks. Investors see U.S. debt as the benchmark safe asset. A crisis here can shake global markets. It may lower asset prices, unsettle banks, and push economies into recession.
Research from the Brookings Institution explains that a crisis need not wait for a default. The fear of unsustainable debt may trigger panic and capital flight.
Juan Carlos Hatchondo from Western University highlights the risk. U.S. Treasuries often act as collateral in repo deals. If their value falls sharply, daily banking and market trades can break down. Many foreign governments store reserves in U.S. debt. A drop in value may weaken their finances and spread instability today.
Political Challenges Compound the Problem
The debt issue worsens with U.S. political fights. Sharp political divides make sound fiscal plans hard. Sudden policy shifts, like those seen after the tariff move, hurt market trust. This doubt stops leaders from taking clear steps to fix the debt. In the near term, any plan to manage the swelling debt seems hard to reach.
Looking Ahead
With the November 4 Federal Budget near, Canada and other nations face their own debt matters in a tougher world. Yet the U.S.—with its large role in finance—stays the main focus.
Investors, policymakers, and economists keep a close watch. High government debt, tense political fights, and shaky markets mix into a storm. This storm might lead to the next great financial crisis, one with global consequences.
For continuous coverage of sovereign debt and deficits, stay tuned to FinancialPost.com.
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