Slowing Global Growth and Rising Financial Risks: Policy Choices Under Dual Pressure

Keywords: financial stability risk; high debt; refinancing risk; growth outlook; global economy

Introduction

The IMF and the World Bank recently issued warnings that highlight two overlapping pressures on the global economy. On one side, financial-stability risk is high, public and private debt remain elevated, and refinancing risk is rising. On the other, the World Bank cut its 2026 global growth forecast to 2.5%. Together, these signals paint a harsh picture for the years ahead. Debt overhang, tighter financing, and weakening growth are feeding into one another, challenging policymakers worldwide.

This article examines the issue from three angles—financial stability, refinancing pressure, and the growth outlook—and discusses possible policy responses.

1. Elevated financial-stability risk: the burden of public and private debt

In its latest Global Financial Stability Report, the IMF said global financial-stability risk is currently "high." That is not an exaggeration. Since the 2008 financial crisis, global debt has kept rising, and the pace accelerated after the COVID-19 outbreak in 2020. By the end of 2024, total public and private debt worldwide exceeded $300 trillion, or about 350% of global GDP. In advanced economies, government debt is generally above 100% of GDP, while many emerging markets face sharply rising debt-service pressure.

The root cause is excessive borrowing during the long low-rate era. For more than a decade, major central banks kept policy ultra-loose, and governments and companies issued debt aggressively, pushing leverage higher. Today the environment has reversed: the Fed, the ECB, and others have raised rates to multi-decade highs, and financing costs have surged. For highly leveraged borrowers, that means rising interest expense and heavier repayment burdens. Some sovereign credit ratings in advanced economies have already been downgraded, lifting funding premia further.

The private sector is hardly better off. A growing share of corporate debt is tied to high-risk "zombie" firms whose profits cannot cover interest expense, forcing them to rely on refinancing to survive. Households also face growing default risks on mortgages and consumer loans as inflation erodes real income. If the economy takes a shock, debt-chain breakage could trigger broader contagion.

2. Refinancing risk is rising: fragility in a high-rate world

Refinancing risk is now a core financial-stability concern. Refinancing means replacing maturing debt with new debt. In a low-rate world this was easy because liquidity was abundant. But when rates are high and credit conditions tighten, refinancing becomes much harder.

Over the next two years, a huge amount of debt will come due. IMF estimates suggest that from 2025 to 2026, global corporate and sovereign debt maturing exceeds $15 trillion. Much of this debt was issued at rates far below today’s levels. Take U.S. high-yield corporate bonds: the average coupon in 2020 was about 4.5%, while current issuance is above 9%. That means the cost of rolling debt could double or more.

For sovereign borrowers, the pressure is even stronger. Some emerging economies such as Argentina, Pakistan, and Egypt already struggle with thin reserves and current-account deficits, and now face tighter global financing conditions. Even some advanced economies, including Italy and Greece, are highly sensitive to interest-rate moves. If refinancing failures spread locally, the shock could travel across borders through capital flows.

More worrying still, refinancing risk and high debt feed each other in a positive-feedback loop: higher rates raise refinancing costs, investors retreat to safety, risk premia rise, financing costs rise again, and eventually some borrowers are forced into default. History shows this spiral has repeatedly triggered financial crises.

3. The World Bank cuts growth expectations: momentum is fading

At the same time, the World Bank cut its 2026 global growth forecast from 2.7% to 2.5%. The change is small, but the signal is important. A 2.5% growth rate is below the average of the past decade and well below the 2.9% seen before the pandemic in 2019. This suggests the world economy is sliding from a mild recovery into a new normal of weak growth.

The slowdown has many causes. First, trade growth is weak. Geopolitical tensions, supply-chain restructuring, and rising protectionism have sharply slowed global trade. The WTO expects global trade growth in 2025 to be only around 3%, far below historical averages. Second, investment appetite is weak. High rates have restrained corporate capex, especially in manufacturing and real estate. Third, structural forces such as aging populations and stalled productivity growth are depressing long-term potential.

The World Bank’s downgrade also reflects a pessimistic view of the policy environment: fiscal space is limited, monetary policy is still tight, and it is hard to deliver meaningful stimulus. Emerging markets also face heavy external debt and capital outflows, which cap growth further.

Notably, 2.5% global growth has often coincided with financial instability. When growth is too weak to generate enough jobs and tax revenue to cover interest costs, debt sustainability comes into question. In other words, financial risk and slower growth are linked both ways: risk suppresses growth, and weak growth worsens risk exposure.

4. Policy response: balancing near-term stability and long-term growth

Faced with these twin challenges, policymakers need to balance short-term stability and long-term growth instead of chasing only one.

First, normalize monetary policy carefully. Major central banks should move gradually based on data and avoid triggering a concentrated refinancing crisis through overly rapid tightening. They should also use macroprudential tools more actively, such as higher capital buffers for systemically important institutions and larger countercyclical buffers.

Second, strengthen debt management and guard against sovereign crises. High-debt countries should pursue debt-restructuring talks, extending maturities and lowering rates. The IMF and World Bank should coordinate technical help and financing support. Corporate-sector deleveraging should be encouraged, and zombie firms should be allowed to exit in an orderly way.

Third, deepen international cooperation to contain spillovers. Global financial stability is a public good. Countries should improve information sharing and policy coordination. Multilateral rules are especially needed for cross-border capital flows and foreign-exchange intervention, while the global financial safety net should be expanded.

Fourth, push structural reforms to rebuild growth momentum. In the long run, only higher productivity can ease debt pressure at the root. Priorities include digital transformation, more investment in education and research, a better business environment, lower entry barriers, and a green transition that creates new growth drivers. Structural reforms take time, but delay only makes the problem worse.

Conclusion

The IMF’s warning on financial-stability risk and the World Bank’s growth downgrade point to the same reality: the world has entered a new stage of high debt, high rates, and low growth. Public and private debt are elevated, refinancing risk is rising, and growth momentum is fading, making the global economy more fragile over the next several years.

Still, crises also create openings. History shows that economies that act decisively, cooperate internationally, and pursue reform often emerge stronger. Governments, central banks, and international institutions must look beyond short political cycles and coordinate with a long-term view. Only then can financial risk be prevented from becoming a systemic crisis, and only then can a foundation be built for sustainable global growth. The road ahead is difficult, but not blocked. The earlier action is taken, the lower the cost; the deeper the coordination, the stronger the resilience.