Foreign Debt Hits Record: High Interest Rates Worsen the Crisis

TVS News AI, editorially supervised, presents Foreign Debt Hits Record: High Interest Rates Worsen the Crisis.

Developing countries’ external debt reached a record high in 2025. According to the World Bank, the total rose by 5.5 percent to $9.4 trillion, equivalent to just under €8.4 trillion. That was the fastest growth since 2021.

At first, this is bad news, but it is not straightforward. The World Bank also reports that private lenders have returned in large numbers, allowing the poorest countries to regain access to bond markets. However, that access remains expensive: Borrowing costs are as high as they have not been in decades.

$9.4 Trillion: Fastest Growth Since 2021

The key development

In its latest data, the World Bank sees a problematic combination: Developing countries’ external debt is growing while financing becomes more expensive. For the affected countries, that means less room to maneuver, even as money is once again available from private lenders.

Higher debt increases the need for capital. If financing now comes with higher interest rates, debt servicing places an additional strain on public budgets. This is precisely where the World Bank warns: The heavy debt burden in the poorest countries could displace essential investments in the population.

The findings are closely linked to global interest-rate trends. Inflation concerns amid the Iran war, higher policy rates and growing government debt have recently pushed capital-market interest rates up worldwide. Government bond yields are trading at levels not seen in years.

Private Lenders Return — at Historically Expensive Terms

More access, but no cheap financing

The return of private lenders is initially good news. Low- and middle-income countries can issue bonds again, and demand for international financing is high. Data from early 2026 already showed correspondingly strong demand.

By mid-August, more than ten countries had already surpassed their bond issuance volume for the entire year 2025. This shows how strongly the countries are approaching the capital market again. At the same time, it illustrates how expensive that access has now become.

Haishan Fu, the World Bank’s director of development data, summarized the trade-off: The return of private lending to low- and middle-income countries is welcome. But these countries are taking on more debt, paying more interest and, in many cases, are left with fewer resources for their long-term development.

$251 Billion: Bond Issuance Reaches a Five-Year High

More financing on worse terms

The strength of the capital-market recovery is evident in bond issuance by public authorities. It grew by well over one-third to $251 billion. That was the highest level in five years. At the same time, borrowing from private lenders surged.

Developing countries have therefore raised more capital despite high yields. Many governments issued bonds to repay existing debt. According to the World Bank, this often occurred at higher interest rates than before. Refinancing therefore does not automatically solve the problem; it can even increase ongoing costs.

High capital-market pressure affects not only developing countries. It also increases financing pressure on industrial countries such as the United States, France and Germany. The situation is particularly tight for low- and middle-income countries, however, because their debt burdens were already high and fewer resources remain for long-term development.

$1.4 Trillion: Debt Servicing Rises for the Fifth Time

The bill lands on the existing mountain of debt

The immediate burden is visible in payments on old and new debt. Low- and middle-income countries paid around $1.4 trillion in US dollars in principal and interest in 2025. That was the fifth consecutive annual increase.

The World Bank therefore points to the relationship between current obligations and future scope for action. High interest rates and rising debt mean a growing share of government funds is tied up in interest and principal payments. At the same time, the yields at which governments raise new money are rising.

Less Room for Investment

The World Bank’s central warning

The sober balance sheet is therefore clear: Developing countries are finding money again, but paying exceptionally high prices for it. The capital market is open again, but high yields make refinancing more difficult and can crowd out necessary investments. The renewed record in external debt is thus above all an indication that relief remains limited despite improved access to financing.