Why the world is threatened by financial collapse: The ticking debt bomb

“You will panic”: Head of the world’s largest bank sounds the alarm – are we facing the next financial crisis?

A gigantic debt bomb is ticking at the heart of the global financial system, threatening to trigger a meltdown that could dwarf anything previously seen. Countries around the world have accumulated mountains of debt reminiscent of the post-World War II era, but the underlying conditions are far more fragile today. Led by the United States, whose national debt has exploded to over $37 trillion, the entire structure is beginning to falter. But Europe, too, is facing a test of endurance: While crisis-hit countries like France are slipping ever deeper into the red with record deficits, even Germany, once a pillar of stability, is beginning to crumble and abandon its fiscal discipline.

Leading financial experts like Jamie Dimon, CEO of the world's largest bank, JPMorgan Chase, are sounding the alarm loudly. His dire warning of a "crack" in the bond market and his prediction, "You're going to panic," are more than just pessimistic assessments—they're an indication of the extreme nervousness in the markets. The "Truss moment" in Great Britain has impressively demonstrated how quickly investor confidence can dwindle and bring down a government within days. Political pressure on central banks, exploding interest burdens, and structural deficits are creating a highly explosive cocktail. This article analyzes the ticking time bomb of global sovereign debt, examines the epicenters of the crisis from Washington to Paris, and explains why the question is no longer whether the big bang will come, but only when.

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What are the main problems of global sovereign debt today?

Global government debt has reached alarming levels reminiscent of the post-World War II era. The debt levels of Western industrialized countries have risen to a level where only nine countries worldwide still receive the highest AAA credit rating from all three major rating agencies. This extreme debt affects not only individual countries, but the entire global financial system.

The United States is leading this worrying trend. Its national debt has more than quadrupled in the past 20 years and now stands at over $37 trillion. This corresponds to a debt-to-GDP ratio of approximately 124 percent. By comparison, the 100 largest companies in the Nasdaq index have a combined market capitalization of just under $30 trillion.

The picture in Europe is more varied. While the Eurozone as a whole has a debt ratio of 87.4 percent, it is divided into two very different blocs. The six most indebted countries – Italy, France, Spain, Greece, Belgium, and Portugal – together have a debt ratio similar to that of the United States. Italy leads the way with 135.3 percent, followed by France at 113.0 percent.

Although Germany has managed to reduce its debt ratio to 62.5 percent, a turnaround is also emerging here. The relaxation of the debt brake, approved in March 2025, opens up new borrowing leeway of up to €220 billion. This development jeopardizes Germany's role as an anchor of stability in the eurozone.

What warnings do financial experts issue?

Leading financial experts are increasingly sounding the alarm about an impending collapse of the bond markets. Jamie Dimon, CEO of the world's largest bank, JPMorgan Chase, has already warned of a "crack" in the bond market, predicting to his supervisors: "You're going to panic." This warning is particularly noteworthy because it comes from one of the world's most influential bankers, who has 19 years of experience as a CEO.

Dimon's concerns focus on the enormous government spending and exploding debt following the COVID-19 pandemic. He emphasizes that these are "huge sums" whose long-term effects are not fully understood. The US's monthly interest payments now amount to $84 billion—more than Germany spends annually on its entire debt service.

Former IMF Deputy Governor Gita Gopinath has already called for a "strategic shift" and described the world's fiscal situation as "worse than you think." She warned of the risks of too rapid debt reduction, but at the same time advocated structural reforms to ensure the long-term sustainability of public finances.

The trend in bond yields is particularly alarming. 30-year US Treasury bonds reached a 52-week high of over 5 percent in May 2025. At the same time, the US lost its last Aaa rating from Moody's, definitively depriving the country of its status as the world's safest borrower.

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How is the situation in the USA developing under Trump?

Donald Trump's return to the presidency significantly exacerbates the already precarious fiscal situation in the United States. His program of tax cuts and tariffs is placing an additional burden on the federal budget, while structural deficits continue to grow. The budget deficit reached 7.5 percent in 2024 despite full employment—a level no other industrialized country can afford.

Even more worrying is Trump's direct attack on the independence of the Federal Reserve. He is attempting to fire Fed Governor Lisa Cook for alleged personal misconduct. This unprecedented move threatens the autonomy of the world's most powerful central bank and could lead to turmoil in the financial markets.

Trump also installed Stephen Miran as the new Fed governor, opening a debate about a "third mandate" for the central bank. In addition to price stability and full employment, the Fed would now also be expected to maintain "moderate long-term interest rates." This interpretation could force the central bank to keep yields on long-term government bonds artificially low to cover the government's back.

Such politicization of monetary policy poses significant inflation risks. Where cheap credit becomes a permanent goal, the danger of inflation increases dramatically. Former Fed Chairs such as Ben Bernanke, Janet Yellen, and Alan Greenspan, along with 18 other high-ranking economic representatives, warned of the consequences for financial market stability.

What is happening in France and what are the consequences?

France is in a particularly critical situation, threatening the entire European financial system. The country is deeply politically divided, and several governments have already failed to curb its ever-increasing debt. The budget deficit reached 5.8 percent of GDP in 2024 and could even exceed 6 percent in 2025.

The rating agencies are reacting with sharp downgrades. Fitch lowered France's credit rating from AA- to A+, and DBRS followed suit with a downgrade from AA (high) to AA. Moody's and Standard & Poor's will publish their ratings in the coming months, with further downgrades expected.

The loss of confidence is already evident in the capital market. Interest rates on French government bonds have risen to the level of Italy—a country traditionally considered a notorious debtor. France is now paying risk premiums similar to those of Italy for ten-year bonds. This is a dramatic change for the Eurozone's second-largest economy.

If France were to resort to European rescue mechanisms, Germany would face hundreds of billions of euros at stake. The European Central Bank would then – as it did with Italy – effectively have to stabilize interest rates on French government bonds, even though its formal mandate only provides for price stability.

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What lessons can be learned from the Truss moment in Great Britain?

The "Truss moment" of 2022 has become a nightmare for many governments around the world, demonstrating how quickly bond markets can bring down a government. Prime Minister Liz Truss lost her position after just 49 days in office after her unfunded tax cut plans caused the bond markets to collapse.

The events unfolded dramatically: The pound plunged to an all-time low against the dollar, bond yields skyrocketed, and pension funds teetered on the brink of insolvency. The Bank of England had to intervene three separate times to prevent a complete collapse of the British government bond market. Only Truss's resignation and the withdrawal of her tax plans calmed the markets.

This example demonstrates the power of financial markets over politics. Investors can bring down a government within days if they lose confidence in its debt sustainability. The 30-year British government bonds, traditionally considered particularly safe, proved to be highly volatile.

Similar patterns repeated themselves in 2024. When the Labour government unveiled plans for drastic spending expansion, the markets reacted with panic selling. Yields on ten-year UK bonds rose by more than 20 basis points in one week—the sharpest increase of the year. Market observers were already calling it a "Liz Truss moment 2.0."

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How do central banks react to debt pressure?

Major central banks are increasingly coming under political pressure to keep financing costs low for highly indebted countries. This development threatens their credibility and independence, which are essential for stable monetary policy.

The Federal Reserve is at the center of this issue. Trump's attempt to fire Fed Governor Lisa Cook represents an unprecedented attack on central bank independence. Nearly 600 economists, including Nobel laureates such as Joseph Stiglitz and Paul Romer, criticized this move as a threat to the institution's credibility.

The European Central Bank has already effectively begun to stabilize interest rates for crisis-hit countries. It is supporting Italy through targeted bond purchases and will be unable to do otherwise with France. Although its formal mandate only encompasses price stability, it has de facto become the savior of over-indebted eurozone countries.

This development poses significant risks to monetary stability. If central banks are primarily required to ensure government financing, they lose their ability to effectively combat inflation. Confidence in currencies could dwindle, leading to further instability.

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What role does Germany play as an anchor of stability?

Germany has long been considered an anchor of stability for the euro and a model for sound public finances. However, this role is increasingly undermining. While the debt ratio, at 62.5 percent, is still well below the EU average, policymakers have undergone a fundamental turnaround.

In March 2025, Germany significantly relaxed its debt brake. The changes allow for a special fund for infrastructure of €500 billion, exempt defense spending above 1 percent of GDP from the debt brake, and grant states additional borrowing leeway. These reforms could increase borrowing capacity by up to €220 billion by 2030.

The Bundesbank itself advocates further easing the debt brake. It proposes raising the debt limit for debt ratios below 60 percent to up to 1.4 percent of GDP. IMF Vice President Gita Gopinath also recommends a moderate easing of one percentage point for Germany.

This development is problematic for European stability. If even Germany abandons its fiscal discipline, the eurozone will lose its most important anchor of stability. Furthermore, conflicts with EU debt rules are looming, as Germany could once again violate the Maastricht criteria.

What are the risks to the global financial system?

The cumulative effect of the global debt crisis could lead to a meltdown of the global financial system. The United States, as the leading financial center and issuer of the world's reserve currency, the dollar, is particularly vulnerable. The American debtor's problems would immediately spill over into global markets.

China and other challengers are already working to break the dollar's dominance. A crisis of confidence in US government finances could accelerate this process and destabilize the international monetary system. The US's previous "exorbitant privilege" of being able to borrow in its own currency could disappear.

The bond markets are already showing signs of stress. After a long period of minimal or even negative interest rates, borrowing costs have risen noticeably. If investors suddenly lose confidence in supposedly safe government bonds, massive disruptions threaten: crashing bond prices will destabilize banks and insurance companies, and skyrocketing interest rates will further exacerbate fiscal distress.

Jamie Dimon is particularly warning about the impact on the real economy. Rising long-term interest rates are placing a massive burden on borrowers, from small businesses to the real estate sector. His bank is already observing increasing weaknesses in corporate balance sheets, especially in the mid-cap lending sector.

What ways out of the debt crisis are there?

The options for solving the global debt crisis are limited and politically difficult to implement. Higher economic growth would be the ideal solution, as it would automatically reduce debt ratios. However, the structural obstacles to growth in developed economies make this increasingly unlikely.

Spending cuts are inevitable, especially where the tax burden is already very high. France is attempting this with a €53 billion austerity package, but is encountering considerable political resistance. Germany, on the other hand, is planning the opposite approach and intends to finance its investments through higher debt.

Controlled inflation could reduce the real debt burden. Many politicians consider the risk of somewhat higher inflation acceptable, especially since creeping inflation reduces government debt in real terms. However, this strategy carries the risk of unanchoring inflation expectations.

Central banks face an insoluble dilemma. They must choose between price stability and financial stability. In times of crisis, money creation remains as a last resort—"whatever it takes," as Mario Draghi put it in 2012. But this option undermines long-term confidence in currencies.

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What does this mean for the future of the global economy?

The ticking debt bomb threatens the stability of the global economic order. The historical parallels to the post-World War II period are unmistakable, but the growth momentum and fiscal discipline of that era are lacking today.

The current debt policy cannot continue in this way. The explosives that have been built up have become highly explosive. Once market confidence is lost, crises can escalate into systemic shocks within days, as the Truss moment demonstrated.

The likelihood of a global financial crisis is increasing daily. Jamie Dimon's warning that it's not a question of if, but when the next shock will come, reflects the assessment of many financial experts. The debt bomb is ticking, and time for preventive measures is running out.

The coming years will show whether the global economy will manage an orderly transition to more sustainable public finances or whether it will be gripped by an uncontrollable debt crisis. The window for voluntary corrections is rapidly closing. What remains is hope for the wisdom of political decision-makers and the resilience of global financial systems.

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