Gokul Padmanaban and Yann Grutzmacher (Left to right) Montage: Paperjam
America owes more than $40trn. Luxembourg’s public debt is also growing. Behind those figures are investors expecting repayment. But who provides the money, why do they keep lending, and what happens if a government cannot pay?
When governments spend more than they collect, they usually borrow to cover the difference. The lenders include banks, investment funds, insurers, pension schemes and individuals. Foreign central banks also buy government debt. Someone saving through a pension scheme or investing in a bond fund may therefore be financing public spending without realising it.
A loan that changes hands
Governments raise much of their debt by issuing bonds: tradable loans promising future payments. An investor buying a newly issued €1,000 bond at face value with a 3% annual coupon receives €30 each year and the €1,000 back at maturity, the repayment date. Selling earlier may mean accepting a different price.
Investors lend because they expect repayment and want a return. Confidence matters: doubts about a government’s finances can lead investors to demand more interest, making borrowing more expensive. The confidence is mostly based on credit ratings from Moody’s or S&P, names you may already have heard in the movie “The Big Short”.
How America reached $40trn
How does a country even end up owing $40trn? In America’s case, by spending more than it collects, year after year. Wars, economic crises, tax cuts and spending programmes have all contributed under successive governments. In August 2026, gross federal debt passed that milestone and with this, the topic of a potential default has come up several times in the last few years. The annual gap between spending and revenue is called the deficit. The government borrows to cover it, adding to its debt. This explains why headlines about a “smaller deficit” can be misleading: the country still owes more than before, it is simply adding to the total more slowly.
The money is owed to a wide range of lenders. American investors, banks and funds hold government debt, as does the Federal Reserve. Some are held by government accounts, including Social Security trust funds. People saving for retirement can therefore be among those lending to Washington, which makes this staggering debt more and more scary for the population.
Foreign investors held around $9.33trn of US government debt in August 2026. Japan led with $1.07trn, followed by the United Kingdom with $1.01trn and China with $591bn. Even our small Luxembourg is present on the list, with $448bn, though this includes holdings through its financial sector, rather than a loan from the Luxembourg government.
For now, investors remain willing to lend. They trust America’s ability to collect taxes and repay them, supported by its large economy and the dollar’s global role. But being able to borrow does not mean borrowing is painless. Interest has to be paid.
What if governments cannot pay back anymore?
Governments rarely repay all their debt at once. Bonds mature at different times, and new borrowing often replaces older debt. This process, called refinancing, allows repayment commitments to be spread over time. The difficulty grows when refinancing becomes more expensive. Let us do the math: replacing $100bn of borrowing carrying 2% interest with debt at 5% adds $3bn to annual interest costs, leaving less room for other spending.
Default means failing to meet a debt obligation as promised, such as missing interest or delaying repayment. In the case of the US, even a temporary delay could unsettle markets because Treasury securities are widely held and used as collateral to secure financial transactions. The United States also faces a political constraint: Congress limits federal borrowing through the debt ceiling. If Treasury exhausts its borrowing authority, temporary measures and available cash, payments are at risk. Issuing dollars does not remove those legal restrictions.
A growing debt stock does not automatically signal an approaching default, but rising financing costs can force governments to make increasingly difficult decisions about taxes and public spending.
Luxembourg’s growing commitments
Borrowing is familiar to Luxembourg too. General government debt rose from approximately €19.1bn at the end of 2022 to €23.7bn at the end of 2025. In October’s draft 2027 budget presentation, the government projected debt of 29.3% of GDP by the end of 2026.
On 14 October, Luxembourg priced a €1.7bn ten-year bond carrying a 3.70% annual coupon. Banks received 47% of the allocation, fund managers 25%, and central banks and official institutions 18%. The Treasury said the issue size was calibrated to an upcoming November repayment, illustrating how borrowing can replace existing debt. These commitments raise questions about future interest payments and the room available to respond to another crisis. Assessing them also requires looking at what the money finances.
Is government debt really that bad?
Whenever a country’s debt hits a new record, the headlines sound the same. Alarming numbers, worried economists, and that someone will eventually have to pay for all of it. But debt on its own is not the problem. What matters is what the money was used for. If a state borrows at 3% and spends the money on something that grows the economy by more than that, it's good for the economy, even with the debt on the books. Debt also gives governments room to move when things go wrong.
During the 2008 financial crisis and again during Covid, borrowing kept businesses alive, paid wages and stopped a bad situation from becoming a catastrophe. Raising taxes in the middle of these kinds of situations would have made it worse. Borrowing lets a country spread the cost of a shock over many years instead of dumping it on one.
What the money is used for
Governments regularly spend on public services such as health and education, when these spendings exceeds revenue governments borrow to cover the shortfall. Many large scale infrastructure projects that generate long term economic growth have high upfront costs and most government borrowings go into these infrastructure investments that are hard to fund from a single year’s tax income. These last for decades, so it makes some sense that the cost is spread over decades too. Governments also borrow during recessions and unexpected events such as pandemics or natural disasters to increase spending when tax revenue declines and stabilise the economy. It may also borrow to refinance its old debt at a better rate.
The new uses of debt: sustainability bonds
On 2 September 2020, Luxembourg launched a Sustainability Bond Framework that follows the International Capital Market Association’s green, social and sustainability bond principles. A few days later it issued the first European sovereign sustainability bond, worth €1.5bn. By issuing bonds within this framework Luxembourg ensures that all bonds issued enjoy international recognition as green, social or sustainable bonds. The money raised from these bonds can only be used to finance eligible expenditures in green and social categories, such as the construction of green buildings, energy transition, the development of low-carbon transport, environmental protection, water and wastewater management, climate financing and Research and Development, access to essential services such as health, education and social inclusion, affordable housing and job creation.
Now in October 2026 Luxembourg has adopted the blockchain technology to issue government debt. It placed the first sovereign benchmark bond issued natively on distributed ledger (blockchain) infrastructure. It was issued through LuxCSD, the national central securities depository, on Clearstream’s D7 platform, and it will be listed on the Luxembourg Stock Exchange. It allows for shorter processing times, full traceability of transactions and fewer operational risks through automation.
What does growing debt mean for the next generation?
When the debt of a country grows the people who carry it are the young people who have no say in what the debt is used for. Part of their future taxes will be used for interest payments instead of schools, pensions or infrastructure but the other way is also true. The generation which inherits a huge debt may also inherit better infrastructure, public services and a country that handled a crisis without falling apart. The question is not how much we owe but what we got for it.
So perhaps the better question is this: when a government borrows today, is it buying something the next generation will be glad to have, or is it paying for today’s comfort and sending them the bill?
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