What are the implications of indebtedness for the global economy? A History Lesson
Ana Carrisso | Fidelity
With a degree in Commerce and Business Administration from the LCCI, Ana Carrisso joined the team at Fidelity International Iberia in 1998, where she has spent her entire career in the asset management sector.
May 2026 by Ana Carrisso
Understanding the state of one's personal finances is usually a relatively simple exercise for the average person. Usually, you just need to look at your bank account to know if everything is going well or badly. Calculating the state of public finances is more complex, but understanding a country's debt level and its implications is crucial to understanding its real impact on the economy and society.
How is public debt calculated?
Total public debt is calculated as a percentage of the gross debt of all public administrations in a state relative to its GDP. To calculate it, liabilities are considered to be currency and deposits, debt securities, loans, insurance, pensions and standard guarantee schemes, and other accounts payable. Portugal ended 2024 (the latest available data) with a debt of €270.881 billion, equivalent to 93.6% of GDP. If this amount were divided among the entire population, the result would be that each Portuguese person would owe 25,199 euros (per capita debt).
Is it bad for a country to be in debt? Not necessarily. The key point lies in debt sustainability, that is, in the country being able to keep its deficit under control, collecting more in revenue than it spends. To draw an analogy, it would be like an individual applying for a mortgage from the bank: The person doesn't have the total amount to buy a house all at once, but he has enough income to pay for it in installments. The problem arises when the budget deficit gets out of control and becomes unsustainable.
The impact of excessive debt.
Excessive debt has a real impact on citizens, as it forces public authorities to make cuts that ultimately affect essential services such as healthcare and education. Furthermore, an unsustainable escalation of debt undermines the country's credibility in international markets, reducing the number of investors willing to buy its debt securities. The lower the demand, the more the state is forced to increase the interest rates it offers on its debt. The higher the interest rates on debt repayment, the lower the state's capacity to sustain its public spending.
Fifteen years ago, Portugal experienced an episode of excessive debt, becoming the third country in the eurozone to request a financial bailout. At the time, the measures imposed by the infamous Troika – the ECB, the IMF and the EU – on Portugal and other European countries in difficulty, notably Greece, involved severe austerity that stifled public finances and curtailed the implementation of social policies. The adjustment was very painful, as many will remember; in Portugal, this involved measures as unpopular as cutting extraordinary subsidies for civil servants and pensioners, or increasing VAT to 23%.
These decisions had a significant impact on the political landscape of the eurozone, causing instability within governments and the emergence of new political groups across the ideological spectrum, with populism gaining ground as a response from voters deeply dissatisfied with the handling of the crisis.
Having learned their lesson, when the pandemic struck, the governments’ response was the opposite: more public spending funded by the state coffers. As a result, Portugal's debt reached a record level of 137% of GDP in 2021.
According to the IMF, global debt-to-GDP stands at 235% (the all-time high was 258% in 2020). Japan It is the most indebted country in the world, with a debt of 230%. Greece, Italy and France are the most indebted European countries (over 100% of their GDP), according to Eurostat. And the trend points to more debt: With the launch of the ReArm Europe program, the EU plans to increase defense spending to ensure the security and sovereignty of its member states. Recent events in the Middle East only reinforce this investment thesis.
Nonetheless, Portugal has maintained a policy of strict control over public debt.; with the approval of the State Budget for 2026, if the forecasts materialize, it would fall for the fifth consecutive year to 87.8% of GDP, the lowest rate since 2009.
Therefore, the next time you wonder to what extent debt influences the global economy, remember: an excessive deficit leads to political instability, cuts to social programs, social unrest, the rise of populism, and extraordinary measures—sometimes requiring a creative approach—to ensure the welfare state is maintained.