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Systems in depth

One section per system: its state at evidence close, its exposures and what the operational series will watch.

8 min read0 figures5 tables18 notesNR-STRATEGIC-FISCAL-GLOBAL-2026-BASELINE

Contents
  1. ·Edition home
  2. ·Executive summary
  3. 1Public budgets and markets stress together
  4. 2Key findings
  5. 3Systems and sectors at baseline
  6. 4Risks and capability
  7. 5Energy shock, sovereign repricing and nonbank selling
  8. 6Readings from the other desks
  9. 7The 2027 agenda
  10. 8Systems in depth
    1. 8.1 Common causes
    2. 8.2 Domino effects
    3. 8.3 Inter-systemic feedbacks
    4. 8.4 Shared vulnerabilities
    5. 8.5 Thresholds and tipping
  11. AMethodology
  12. BData appendix
  13. CReferences and record
  14. ·Complete edition, for print

8.1Common causes

One cause can strike many budgets and markets at once: an energy shock, a rise in rates, a war or a loss of confidence. The shared cause matters more than the country.

<94% of GDP

global public debt, 20251

>10million barrels a day

crude flow losses in the 2026 conflict4

1.9% of GDP

average cyclically adjusted primary deficit in advanced economies since 20224

Table 8.1Evidence at baseline
InstanceMechanism in actionEvidenceStatus
Persistent deficitsdeficits projected at or above 2025 levels in 2027 in most jurisdictions4Reported
Rising interest costsinterest weighs on budgets, most in developing countries2Reported
Energy shockinflation up by half a percentage point; yields up46Reported
Spending pressuressocial needs, defence and strategic autonomy strain budgets1Reported

Pathways in this mechanism

  • ENE → FIN energy shock
  • FIN → FIN interest costs
  • CON → FIN conflict

Evidence to bind in 2027

  • common cause tagging of fiscal stress episodes
  • frequency of concurrent causes

Related editions

  • GLB Global Systems
  • SR-01 Global Polycrisis and Cascading Systems Risk
  • SR-03 Global Supply Chains, Trade and Chokepoints
  • SR-07 Inequality and the Social Contract
  • GS-05 Finance and Economy
  • GS-06 Development

8.2Domino effects

A failure in one market removes funding or confidence from the next. Stress in sovereign bonds reaches funds, banks and weaker borrowers in sequence.

53%

nonbank share of advanced-economy sovereign holdings, 20255

≈180%

bank sovereign exposure to Tier 1 capital, emerging economies, 2025 median5

≈70%

bilateral USD repos with hedge funds at zero haircut5

Table 8.2Evidence at baseline
InstanceMechanism in actionEvidenceStatus
Bonds to fundsleveraged funds intermediate government debt and can sell fast56Reported
Funds to banksrepo and prime brokerage link funds to banks5Reported
Banks to sovereignsbank holdings tie bank health to the sovereign5Reported
Markets to weaker borrowersportfolio flows to emerging markets run through nonbanks6Reported

Pathways in this mechanism

  • FIN → FIN bonds to funds
  • FIN → FIN funds to banks
  • FIN → DEV market access

Evidence to bind in 2027

  • timing of selling by investor type
  • bank-level sovereign exposure by country

Related editions

  • GLB Global Systems
  • SR-01 Global Polycrisis and Cascading Systems Risk
  • SR-03 Global Supply Chains, Trade and Chokepoints
  • SR-07 Inequality and the Social Contract
  • GS-05 Finance and Economy
  • GS-06 Development

8.3Inter-systemic feedbacks

Budgets depend on markets, and markets depend on budgets. Yields feed interest costs, interest costs feed debt, and debt feeds yields.

>50%

of the rise in nominal debt in 2025 to 2030 from interest, per IMF projections cited by the BIS5

3.8%

US Treasury market crisis probability when debt-to-GDP is high5

0.3%

same probability when debt-to-GDP is low5

Table 8.3Evidence at baseline
InstanceMechanism in actionEvidenceStatus
Interest to debthigher yields raise interest, which adds to debt5Reported
Debt to yieldshigh debt weakens monetary transmission and lifts yield swings5Reported
Banks and sovereignssovereign stress hits banks, which hold the debt4041Inferred
Growth and revenuelower growth cuts revenue and lifts the ratio11Inferred

Pathways in this mechanism

  • FIN → FIN interest to debt
  • FIN → FIN debt to yields
  • FIN ↔ FIN banks and sovereigns

Evidence to bind in 2027

  • feedback strength by country
  • effect of nonbank holders on the loop

Related editions

  • GLB Global Systems
  • SR-01 Global Polycrisis and Cascading Systems Risk
  • SR-03 Global Supply Chains, Trade and Chokepoints
  • SR-07 Inequality and the Social Contract
  • GS-05 Finance and Economy
  • GS-06 Development

8.4Shared vulnerabilities

Different budgets share the same weak points: the same holders, the same funding markets, short-term issuance and hidden debt.

40.2USD trillion

US federal debt outstanding, 30 Sep 202644

180.7JPY trillion

Japan FY2026 bond plan19

110basis points

sovereign spread linked to higher debt in developing economies12

Table 8.4Evidence at baseline
InstanceMechanism in actionEvidenceStatus
Concentrated holdersa few investor classes hold most advanced-economy debt5Reported
Short-term issuancegovernments lean to shorter bonds and raise rollover risk623Reported
Hidden liabilitiesrevelations cause large spikes in spreads1230Reported
Safe-asset statusa weakened US Treasury safety premium raises repricing risk19Reported

Pathways in this mechanism

  • FIN → FIN holder concentration
  • DAT → FIN hidden debt
  • FIN → FIN safe-asset premium

Evidence to bind in 2027

  • investor holdings outside advanced economies
  • contingent liabilities on a common basis

Related editions

  • GLB Global Systems
  • SR-01 Global Polycrisis and Cascading Systems Risk
  • SR-03 Global Supply Chains, Trade and Chokepoints
  • SR-07 Inequality and the Social Contract
  • GS-05 Finance and Economy
  • GS-06 Development

8.5Thresholds and tipping

A system can absorb stress until a threshold is crossed. Market access, restructuring speed and bank capital are such thresholds for public finances.

741USD billion

LMIC net payments above new financing, 2022 to 20243

51countries

spending more on interest than on health or education2

≈ 75%

of Basel Committee members implementing or about to implement Basel III, 9 Mar 202645

Table 8.5Evidence at baseline
InstanceMechanism in actionEvidenceStatus
Market accessnet payments above new financing signal closing windows3Reported
Restructuring capacityplaybook and manual updated; processes still slow1413Reported
Bank capitalabout 75% of members implementing or about to implement; later status not bound45Reported
Tipping in marketsfiscal space can shrink well before a long-run limit5Inferred

Pathways in this mechanism

  • FIN → DEV market access
  • FIN → FIN restructuring
  • FIN → FIN bank capital

Evidence to bind in 2027

  • restructuring timelines
  • thresholds at which funding markets freeze

Related editions

  • GLB Global Systems
  • SR-01 Global Polycrisis and Cascading Systems Risk
  • SR-03 Global Supply Chains, Trade and Chokepoints
  • SR-07 Inequality and the Social Contract
  • GS-05 Finance and Economy
  • GS-06 Development

Notes

Numbers are the edition’s reference numbers, so a note reads the same in every chapter. The full list, with every source and its licence, is in Annex C. Annex C, references

  1. 1IMF (ed.), Fiscal Monitor, April 2026 (publication page; global public debt just under 94% of GDP in 2025 and 100% by 2029; key messages; estimates use information to 1 April 2026). International Monetary Fund, Washington. Observation year 2025. Accessed 2026-11-03.back
  2. 4BIS (ed.), Annual Economic Report 2026, Chapter I: Progress and peril (chapter page; fiscal positions, energy shock, equity valuations). Bank for International Settlements, Basel, 28 June 2026. Observation year 2026. Accessed 2026-11-03.back
  3. 2UNCTAD (ed.), A World of Debt 2026: Rising debt costs and stalling development (publication page; about USD 111 trillion of global public debt in 2025; about USD 35 trillion in developing countries; net interest about USD 995 billion; median 8.1% of revenue; 51 countries and 3.7 billion people). United Nations Conference on Trade and Development, Geneva. Observation year 2025. Accessed 2026-11-03.back
  4. 6IMF (ed.), Global Financial Stability Report, April 2026 (key messages page of 14 April 2026). International Monetary Fund, Washington. Observation year 2026. Accessed 2026-11-03.back
  5. 5BIS (ed.), Annual Economic Report 2026, Chapter II: High public debt and shifting financial markets, challenges for central banks (chapter page read to character 100,000 of 120,069). Bank for International Settlements, Basel, 28 June 2026. Observation year 2025. Accessed 2026-11-03.back
  6. 40UNVERIFIED, not opened: Brunnermeier, M.K., Garicano, L., Lane, P.R., Pagano, M., Reis, R., Santos, T., Thesmar, D., Van Nieuwerburgh, S. and Vayanos, D., The sovereign-bank diabolic loop and ESBies, American Economic Review 106(5), 508 to 512, 2016, cited from memory. Observation year 2016. Accessed 2026-11-03.back
  7. 41UNVERIFIED, not opened: Gennaioli, N., Martin, A. and Rossi, S., Sovereign default, domestic banks, and financial institutions, Journal of Finance 69(2), 819 to 866, 2014, cited from memory. Observation year 2014. Accessed 2026-11-03.back
  8. 11IMF (ed.), World Economic Outlook, April 2026 (page of 14 April 2026; growth 3.1% in 2026 and 3.2% in 2027; downside risks). International Monetary Fund, Washington. Observation year 2026. Accessed 2026-11-03.back
  9. 44US Department of the Treasury, Bureau of the Fiscal Service (ed.), Debt to the Penny (data service queried for record date 30 September 2026; total public debt outstanding USD 40.17 trillion; debt held by the public USD 32.43 trillion). Fiscal Data, Washington. Observation year 2026. Accessed 2026-11-03.back
  10. 19Ministry of Finance Japan (ed.), JGB Investor Presentation, August 2026 (FY2026 government bond issuance JPY 180.7 trillion; refunding bonds JPY 135.8 trillion; interest payments JPY 13.07 trillion or 10.4% of general account expenditure). Ministry of Finance, Tokyo. Observation year 2026. Accessed 2026-11-03.back
  11. 12World Bank (ed.), Global Economic Prospects, June 2026 (publication page; growth 2.5% in 2026; debt and sovereign spreads in developing economies). World Bank, Washington. Observation year 2026. Accessed 2026-11-03.back
  12. 23UNVERIFIED, not opened: OECD (ed.), Global Debt Report 2026 (released 4 March 2026; record gross sovereign borrowing in the OECD area; refinancing needs; shorter maturities), taken from search-result summaries; the report pages returned an access error and no figure is used. Organisation for Economic Co-operation and Development, Paris. Observation year 2025. Accessed 2026-11-03.back
  13. 30UNVERIFIED, not opened: press reports on the undisclosed debt of Senegal and the staff-level agreement with the IMF of August and September 2026, taken from search-result summaries; estimates of the hidden amount differ and none is used. Observation year 2026. Accessed 2026-11-03.back
  14. 9Moody’s Ratings (ed.), The US Sovereign Rating Action (page read: ratings lowered to Aa1 from Aaa, outlook stable, 16 May 2025; the page gives no reasons or figures). Moody’s, New York. Observation year 2025. Accessed 2026-11-03.back
  15. 3World Bank (ed.), International Debt Report 2025 (data blog of 3 December 2025; external debt USD 8.9 trillion in 2024; USD 741 billion net payments over 2022 to 2024). World Bank, Washington. Observation year 2024. Accessed 2026-11-03.back
  16. 45Basel Committee on Banking Supervision (ed.), Governors and Heads of Supervision welcome progress to implement Basel III and discuss elements of the Basel Committee’s work programme (press release of 9 March 2026; about 75% of member jurisdictions have now implemented, or will shortly implement, the standards; the release gives no count). Bank for International Settlements, Basel. Observation year 2026. Accessed 2026-11-03.back
  17. 14IMF, World Bank and G20 Presidency (eds.), Global Sovereign Debt Roundtable, 6th Co-Chairs Progress Report (press page of 15 April 2026; updated restructuring playbook and liability management manual; the report PDF was not opened). International Monetary Fund, Washington. Observation year 2026. Accessed 2026-11-03.back
  18. 13POST-CLOSE, context only: IMF, World Bank and G20 Presidency (eds.), Global Sovereign Debt Roundtable, 7th Co-Chairs Progress Report (press page of 14 October 2026; the report PDF was not opened). International Monetary Fund, Washington. Observation year 2026. Accessed 2026-11-03.back

Cite this chapter

Valadbaygi, S. (Ed.). (2026). Chapter 8: Systems in depth. In Strategic Systems Report 2026: Sovereign, Fiscal and Financial Resilience (Baseline Edition 2026, Report No. NR-STRATEGIC-FISCAL-GLOBAL-2026-BASELINE) [Draft under review]. The Global Centre for Risk and Innovation (GCRI).

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