You are the chairperson of a bank’s credit committee and the following three loans have come before you. To whom would you rather lend?
Loan one is to a successful entrepreneur who seems to have gone off the rails, spending like wild on parties and drugs, and in need of ever more cash to keep the lifestyle going. Borrower two is in business, elderly but reputable. They have vast existing debts and profligate spending plans, but lots of assets and a reputation for hard work. The question is where their future income will come from.
Loan three is to an aristocrat who lives in a delightful stately home. Their existing debts are heavy, and between the school fees, the horses and the cost of fixing the roof, their commitments are too. The house looks nice, but the rooms are bare, and the owner’s earning prospects look dubious.
These three borrowers represent the choice confronting investors as they look around the world at the dismal fiscal state of the world’s developed economies. There is the US – candidate one – running a near 6 per cent of gross domestic product (GDP) deficit for no good reason except that taxes are un-American, with no plan and seemingly no desire ever to do anything about it.
Then there is Japan – candidate two – which has a massive public debt, an ageing population and has made the odd decision to carry on with deficit spending even after fixing its problem with deflation. Japan is asset rich, however, both its government and its people.
Finally there is Europe – candidate three – where big debtors include countries such as France, Italy and the UK. In Europe there is at least rhetorical attention to the control of debt and deficits, but many nations have made lavish spending promises, which their economies are increasingly ill-equipped to support, and there is almost no political will to confront voters with that harsh reality.
As bond yields tick upwards, with 30-year yields exceeding 4 per cent in Japan and 5 per cent in the US and UK, the fiscal pressure on every indebted economy is mounting.
Each country bemoans its own fiscal problems and the profligacy of the politicians who caused them. All have been marked by large increases in public debt since the 2008 financial crisis, and since Covid in particular. But despite the surface similarity, the nature of the fiscal challenge in each country is quite different, and some would be notably easier to solve than others.
The US, for example, now has net public debt of about 99 per cent of annual output, according to the International Monetary Fund (IMF). That figure is projected to keep rising fast because of a large and unaddressed fiscal deficit. But the US has that deficit largely by choice: it has chosen to cut taxes repeatedly without cutting spending. It has robust economic growth, which makes debt much easier to tackle, since you can raise income without raising taxes. There is also a vast global appetite to hold US treasuries. If the political system ever gets its act together – if the entrepreneur ever gets tired of the binge – then its fiscal problems are quite solvable.
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Japan’s public debt, which has been large for a long time, is often thought of as a global outlier. But on a net basis, projected to be 134 per cent of GDP in 2026 according to the IMF, it no longer looks so vastly different from the levels of other rich countries. The most difficult part of Japan’s fiscal problem is its relentless ageing, with the costs of healthcare and pensions rising every year and a dwindling working-age population to pay for them.
It currently has a good window to tackle its finances. The return of inflation is eroding the stock of debt borrowed when interest rates were zero. Prime minister Sanae Takaichi seems determined to waste the opportunity with an unnecessary spending splurge, but this is at least discretionary spending rather than welfare handouts. Japan’s great strength, meanwhile, is its position as a large creditor to the rest of the world. Its people have a lot of savings even if their government has a lot of debt. It is not dependent on the kindness of strangers.
That leaves Europe, and countries such as France, where net debt is 108 per cent of annual output on the IMF’s October 2025 measure, Italy, where it is 128 per cent, and the UK where it is just over 94 per cent. All of these countries have persistent fiscal deficits they have struggled to bring under control since the pandemic. There is little growth, tax burdens are high and most countries are locked into an expensive welfare state, which their citizens are unwilling to give up.
The UK, which has a persistent current account deficit as well as its fiscal deficit, and a threadbare public sector, having sold off almost every asset that was not nailed down, looks especially short of options. Europe’s problem is fundamentally one of spending, and unless there is a sudden revival of growth, it can only really be solved by persuading populations that they are poorer than they think they are – a thankless task for any politician.
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Fiscal outlooks are dire in many countries, and for the first time in decades, markets are starting to press the issue. But some are more solvable than others.
As every banker knows: better a borrower who will not pay than one who cannot. – Copyright The Financial Times Limited 2026