Global debt crisis and interest trap deepen in 2026

Dr. Deniz Istikbal - Istanbul Medipol University

The period from 2020 to 2026 has been defined by successive crises, conflicts, and economic shocks. What began with the COVID-19 pandemic evolved into a wave of disruptions that have deeply affected societies, particularly national treasuries. Governments were the first to act during the pandemic, but falling tax revenues forced them to finance emergency measures through massive borrowing. Public spending surged alongside extraordinary liquidity injections into markets. While corporations survived the downturn with minimal damage thanks to low interest rates and state support, the rapid accumulation of sovereign debt since 2020 has set the stage for even larger financial crises ahead.

Record debt and the interest vicious cycle

Unlike the European debt crisis of 2013, today’s excessive global borrowing has merged with rising inflation, creating a more dangerous dynamic. Higher interest rates have drastically increased the cost of servicing existing debt. According to the OECD, total global borrowing hit an all-time high of $348 trillion in the first months of 2026, and could rise by another $29 trillion by year-end. When such enormous sums are owed, a growing share of tax revenues goes not to public services but to interest payments, pushing governments to borrow even more. In the United States, for example, federal interest payments have reached $1.1 trillion—an amount roughly double Türkiye’s entire annual public spending for 2026.

Developed vs developing nations

The OECD’s latest report shows that interest payments now exceed 3% of GDP across most developed economies. For less developed and emerging nations, the situation is even worse. These countries borrow at higher rates and spend a much larger portion of their national income on debt service. A vicious cycle is now firmly in place: total debt continues climbing, interest payments rise in tandem, and governments are forced to cut back on education, health care, and infrastructure while channeling funds toward defense. Between 2020 and 2026, global debt has surged from $260 trillion to $348 trillion, with the OECD predicting it will surpass $370 trillion by the end of the year. In just six years, over $100 trillion in new debt has been added, while trillions more have been paid out in interest without reducing the principal.

America’s interest spiral

For the United States—the global hegemon in trade, payment systems, and reserve currency—the situation is particularly precarious. With public debt exceeding $39 trillion and annual interest payments above $1 trillion, the federal government’s total outlays stand at $7.1 trillion against a budget deficit of $1.68 trillion. Continued deficit spending only increases borrowing needs and interest costs. This trajectory poses the single greatest threat to the dollar’s hegemony, far more than China’s yuan aspirations. If Washington remains trapped in this interest cycle, a global crisis could erupt—one potentially more severe than the 2013 European debt crisis.

Who really pays the interest?

Interest—constructed around concepts of borrowing costs, risk, and collateral—has been with human societies for centuries. Today, it is experiencing a golden age as a core component of the global financial system. Ultimately, working populations pay interest through taxes and consumer debt. According to the World Bank, total global interest payments rival the GDP of the world’s five largest economies. While the US federal government pays $1.1 trillion in interest, state governments, corporations, and individuals pay far more. Credit card interest alone has surged over the past five years, delivering massive profits to financial institutions. Similar trends are visible in Türkiye’s banking sector profits.

Escaping the global debt crisis

Exiting the looming debt crisis will be difficult and will require a prolonged adjustment period. Since 2020, government expenditures have risen steadily alongside inflation. As states control larger shares of national economies, regional conflicts—including the wars in Ukraine and Iran—have spread, triggering energy-driven inflationary waves. If such a crisis becomes prolonged, the post-2022 scenario could repeat itself: rising interest and inflation, social unrest, and accelerating interest payments. The simple truth is that disentangling from interest is extraordinarily difficult, reducing debt levels takes decades, and the global economy is not prepared for what lies ahead.