Forgive Us Our Debts

Public debt is rising at its fastest rate since World War II, as nearly all major governments seek to stimulate their shaky economies. Who's most at risk from the ballooning debt bubble? It's an important question, since countries that struggle to service their debt will pay more to borrow and be forced to slash spending on everything from health care to education. (Already, there's been a slew of sovereign downgrades worldwide. Bankruptcy's specter no longer haunts just poor nations.)

Size matters when it comes to debt, but it's not the only factor—or even the most important one. Japan, for example, has long carried the highest gross debt to GDP ratio of any major economy (IMF 2009 estimates put it at a whopping 217 percent), and it will continue to do so in the years ahead. Yet the bulk of Japanese debt is owned by the country's pensioners—which makes it an internal problem, one that will likely continue to result in slow stagnation rather than a major economic upheaval. EU nations like Italy (109 percent), Germany (76 percent) and France (72 percent) also carry large debt loads, but have for some time. For them, high debt is status quo, and while it's not good for their longer-term economic prospects, their politics and institutions are designed to cope with it.

More problematic are the U.S. and the U.K., where relatively low debt loads are rapidly rising thanks to the financial crisis. U.S. debt now stands at 81 percent of GDP; Britain's is 61 percent. But the U.K.'s debt has been increasing faster than that of any other big nation, rich or poor—between 2006 and 2010, Britain's gross debt will have grown by nearly 59 percent. "The U.K.'s fiscal position wasn't great even before the crisis," says Holger Schmieding, head of European economics for Bank of America Merrill Lynch. "It's going to have big trouble adjusting to and servicing the new debt levels, especially as interest rates begin to rise." Already, Standard & Poor's downgraded its outlook for British sovereign debt from "stable" to "negative." The U.S. is at risk, too, but demographics will help. "The best way to lower debt is to grow," says AXA chief economist Eric Chaney, and a younger population will continue to result in higher growth rates in America relative to European countries.

Ultimately, all these nations will have to rein in debt to avoid a downgrade or even default, but so far, only Germany has been laying the political groundwork. The German parliament recently passed a law requiring balanced budgets by 2016. While pulling it off may require an entirely new economic model, other countries should take heed: the money rolling off central-bank presses today could carry a very high price tomorrow.