Globalization gave the world economy a big boost, speeding up trade, technology, and living standards worldwide. But there’s also a downside: when economies are closely connected, a local crisis can quickly become a global one, especially when the US is involved.
The 2008 crisis is a good example. It started with the collapse of the US housing market, but because banks and financial markets were closely connected, the crisis quickly spread around the world, hitting far more than just the S&P 500, Nasdaq, or Dow Jones.
And the story seems to be repeating, although this time it’s not private-sector debt, but government debt, which has topped $40 trillion, with servicing costs now the second-largest budget expense, worrying investors. It’s not that the Treasury said it won’t repay its debt, but some investors are starting to price in that risk.
Fears of a Fed rate hike in September, alongside surging energy costs and renewed pressure on gold and silver prices amid rising tensions in the Middle East, don’t help either.
Plus, there’s still no clear answer on whether Kevin Warsh will raise rates, as at Jackson Hole he only said he would “do what he has to do” without giving any concrete signal. The market, however, is pricing in a 65% chance of a September hike.
Hence, as US Treasury yields rise, European yields and corporate borrowing costs follow, since higher risk-free rates mean businesses have to pay more to borrow.
That said, countries’ fiscal problems are adding to the pressure. France’s public debt, for example, has risen from 114% of GDP in 2020 to 117% in 2026, with a deficit above 5% and spending growing faster than revenue. Italy also has a heavy debt load at around 139% of GDP, although its fiscal position is better, with the deficit falling and the primary balance in surplus.
Thus, debt markets are caught in a perfect storm.
The good news is that there are ways out. First, it would help if the Strait of Hormuz reopened and tankers could pass through without the risk of being hit. Second, countries will have to take unpopular measures like cutting spending and raising taxes.
The bad news is that not all governments will agree to make those sacrifices and may leave the problem for whoever comes next.
Conclusion: for those staying in the market, diversification is key to keeping risks in check.
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