GRAPHIC-Under pressure: Tracking the pain in G7 government debt

By Yoruk Bahceli, Ben Welsh, Dhara Ranasinghe and Rocky Swift

LONDON, May 18 (Reuters) - The world's major economies have seen their debt levels surge in recent years, while ever-increasing spending demands - from ageing populations to climate change and defence - add to the pressure. Enter the Iran war, which has rekindled inflation risks that will strain governments hit by a multitude of shocks this decade alone.

With no end in sight to the conflict, the pressure is building as traders bet on central bank rate hikes and long-term borrowing costs march higher. U.S. 30-year borrowing costs have risen above 5%, touching a one-year high on Monday, and 10-year Japanese bond yields reached a 30-year high.

A high debt burden that costs a government more risks hurting living standards by constraining spending and curbing growth. This live dashboard tracks key measures of government debt across the Group of Seven advanced economies:

RISING BORROWING COSTS

G7 government bond yields have surged following the COVID-19 pandemic and Russia's invasion of Ukraine, as central banks raised interest rates aggressively to tame surging inflation.

Elevated longer-term borrowing costs also reflect investors demanding better returns to compensate for the risk of holding the debt. The Iran war is the latest challenge. Britain pays the highest among peers, with 30-year yields rising to a 28-year peak last week as political uncertainty adds to the pain.

GOING SHORTER

The difference between shorter- and long-dated bond yields has increased sharply, making it relatively more expensive to borrow for longer.

The pressure is being intensified by fiscal concerns, central banks reducing bond holdings and big traditional investors in long-term debt such as insurers and pension funds reducing their purchases from Japan to Britain.

To mitigate the impact, many governments have started selling bonds with shorter maturities. But that's risky too because they have to repay or refinance the debt sooner, so any rise in yields feeds faster into interest costs.

ONE-WAY TRACK?

Debt is roughly equal to or higher than economic output across the G7 bar Germany, Europe's biggest economy.

The 2008 global financial crisis, the 2011-2012 euro zone debt crisis and the 2020 pandemic all increased debt levels, hurting growth and raising spending.

Japan has the highest level, with debt more than double its output, while even Germany, once a champion of austerity, is ramping up borrowing.

Longer-term, ageing populations, interest bills and increased spending on defence and climate change will raise debt levels further unless there are policy changes.

INTEREST PAYMENTS

Higher post-pandemic borrowing costs are feeding into governments' interest payments as they refinance low-cost debt at elevated market rates. While well below historical peaks for many countries, interest payments as a share of output have risen steadily across most G7 countries recently, notably in the United States. In fact, interest payments across OECD countries already topped defence spending in 2024.

RISING RISK The term premium on U.S. Treasuries, a key measure of how much compensation investors demand for the risk of holding longer-term bonds, has risen since the pandemic.

That reflects anything from concern about U.S. fiscal policy to the Federal Reserve cutting its bond holdings and worries about its independence as well as longer-term inflation uncertainty.

It's a global phenomenon. The term premium across major OECD countries reached its highest in over 10 years, the organisation found recently.

MIND THE GAP If there is one debt metric that has improved, it's how little investors are now willing to be paid to hold individual euro zone governments' bonds rather than those of Germany, which is deemed Europe's safest borrower.

The bloc has come a long way from its debt crisis when Greece needed a bailout and the risk of a euro zone breakup sent those costs surging.

Look at Italy. Once the poster child for debt woes, growing European cohesion after the pandemic, political stability and a lower budget deficit pushed its debt risk premium to the lowest since 2008 recently. In contrast, investors now attach greater risk to holding French bonds as a fractured political backdrop since a 2024 election slows efforts to rein in the budget deficit.

BUYER BEWARE Japan, the most indebted country in the developed world, is in the spotlight because Prime Minister Sanae Takaichi's spending plans have rekindled fiscal concerns. Debt sales are under careful watch for signs of stress after a disastrous long-term bond sale kicked off Japan's bond market woes last May.

Long-term bond yields surged to records then after the sale of a 20-year bond saw the lowest level of demand since 2012 and another measure of investor sentiment reached its second-worst since at least 1987. Japan trimmed longer-dated bond sales in response, helping stabilise demand. But pressure is building with 10-year yields surging to the highest since 1996 on Monday.

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(Reporting by Yoruk Bahceli, Dhara Ranasinghe and Rocky Swift; Graphics by Ben Welsh; editing by Elisa Martinuzzi, Toby Chopra and Emelia Sithole-Matarise)