Debt Sustainability - Contrasting Realities of Reserve Currency and Non-Reserve Currency Status Countries
Key Takeaways
- US national debt reached $38.86 trillion by March 2026, with a debt-to-GDP ratio of approximately 101% and projected to reach 120% by 2036 (CBO).
- US interest payments on national debt have reached approximately $970 billion annually, now exceeding spending on both national defence and Medicaid.
- Reserve currency status provides advantages (lower borrowing costs, no FX risk) but does not exempt nations from consequences of excessive borrowing.
- Three landmark emerging market debt restructurings (Sri Lanka, Ghana, Zambia) completed in 2024, demonstrating the acute vulnerability of non-reserve currency nations.
- The dollar’s share of global reserves has declined from 72% in 2000 to approximately 58% in 2025 (IMF COFER), though it remains dominant.
The level of debt is deemed unsafe by the International Monetary Fund (IMF) when there’s a substantial risk that, under current and anticipated policies, the debt-to-GDP ratio will persistently rise, potentially leading to default in the future [1]. Yet, determining this threshold is complex. The trajectory of the debt ratio hinges on three key factors: primary budget balances (net spending after interest payments minus revenues), the real interest rate (nominal rate minus inflation rate), and the real rate of economic growth [2].
What Is a Reserve Currency and Why Does It Matter for Debt?
A reserve currency is a foreign currency held in significant quantities by central banks as part of their foreign exchange reserves. The US dollar has been the primary reserve currency since 1944, representing approximately 58% of global reserves in 2025 (down from 72% in 2000). Reserve currency status allows governments to borrow in their own currency at lower interest rates, eliminating foreign exchange risk on sovereign debt. This privilege creates fundamentally different debt dynamics: the US can sustain a debt-to-GDP ratio of 101% while Sri Lanka defaulted at 105%, because reserve currency issuers can access deep domestic capital markets and - as a last resort - monetize debt through their central bank.
Reserve Currency vs Non-Reserve Currency: The Privilege Gap
Reserve vs Non-Reserve Currency Debt Indicators (March 2026)
| Country | Debt-to-GDP | Interest/Revenue | Credit Rating | Reserve Currency? | Source |
|---|---|---|---|---|---|
| United States | ~101% | ~16% | AA+ | Yes (primary) | CBO, S&P |
| Japan | ~255% | ~8% | A+ | Yes (secondary) | IMF, S&P |
| United Kingdom | ~100% | ~8% | AA | Yes (secondary) | OBR, S&P |
| France | ~113% | ~4% | AA- | Yes (via EUR) | INSEE, S&P |
| Sri Lanka | ~105% | ~60%+ (pre-restructuring) | CCC+ | No | IMF, Fitch |
| Ghana | ~83% | ~50%+ (pre-restructuring) | CCC+ | No | IMF, Fitch |
| Zambia | ~90% | ~30%+ (pre-restructuring) | CCC+ | No | IMF, Fitch |
| Argentina | ~90% | ~15% | CCC | No | IMF |
Sources: IMF World Economic Outlook, CBO, OBR, S&P Global Ratings, Fitch. Pre-restructuring figures for Sri Lanka, Ghana, Zambia reflect conditions at time of default. Data as of early 2026.
Debt sustainability is not a uniform concept; it varies significantly between countries with reserve currency status [3] and those without. The disparities stem from borrowing conditions, market perceptions, and the economic dynamics inherent to each status. The following elucidates why debt sustainability diverges between these two groups:
Borrowing Costs and Market Perception
Reserve Currency Status Countries: Lower borrowing costs due to their currency’s reputation as a secure and stable asset, these countries inspire investor confidence that translates into lower interest rates on their government debt. This diminished cost of borrowing facilitates the management of debt obligations. However, even this advantage has limits. US interest payments have reached approximately $970 billion annually - nearly triple the level in 2020 - and now exceed spending on national defence and Medicaid. CBO projects interest costs will surpass $1 trillion in 2026 and reach $2 trillion by 2036.
Non-Reserve Currency Status Countries: Generally, higher borrowing costs that reflect risk perceptions tied to their currencies, leading to higher interest payments on their debt and exacerbating the challenge of debt servicing.
The Emerging Market Debt Restructuring Wave
The contrast between reserve and non-reserve currency countries was starkly illustrated by the 2022-2024 wave of sovereign debt restructurings. Three landmark cases completed by the end of 2024 demonstrate what happens when non-reserve currency countries face unsustainable debt burdens:
Sri Lanka defaulted in April 2022 amid an acute balance-of-payments crisis. It completed its $12.5 billion bond exchange in December 2024 with 98% bondholder participation, and its economy has since recovered with 5% GDP growth in 2024. However, the restructuring required severe austerity, sharp currency depreciation, and a multi-year IMF programme.
Ghana sought to restructure $13 billion in sovereign bonds through the G20 Common Framework, initiating a Domestic Debt Exchange Programme in 2022 that imposed losses on local pension funds and banks before proceeding to external restructuring.
Zambia restructured $3 billion in bondholder debt under the Common Framework, becoming the first country to complete the process in 2024 after nearly four years of negotiations.
In each case, the absence of reserve currency status meant these nations could not “print their way” out of crisis, had no access to deep domestic capital markets at low rates, and faced devastating currency depreciation that amplified the burden of foreign-currency debt. The IMF’s Global Sovereign Debt Roundtable continues working to streamline restructuring processes, but the lesson is clear: non-reserve currency countries operate with far narrower fiscal margins.
Foreign Exchange Risk
Reserve Currency Status Countries: Can borrow in their own currency, effectively sidestepping foreign exchange risk. Borrowing in their domestic currency obviates concerns about currency fluctuations impacting the cost of servicing foreign currency-denominated debt.
Non-Reserve Currency Status Countries: Borrowing in foreign currencies exposes countries to foreign exchange risk. Currency depreciation against the currency of borrowing can increase the cost of debt servicing. Cross-border payment infrastructure plays a critical role in managing FX exposure for institutions operating across currency regimes.
Flexibility in Monetary Policy
Reserve Currency Status Countries: Have greater flexibility in their monetary policies since they control the issuance of their own reserve currency. They can adjust interest rates and implement measures to address economic challenges without concern for exchange rate stability.
Non-Reserve Currency Status Countries: Lacking their own reserve currency, these nations may prioritize exchange rate stability to prevent drastic currency depreciation. This prioritization can limit their leeway in shaping monetary policy.
Demand for Currency
Reserve Currency Status Countries: Countries with reserve currency status experience strong global demand for their currency, making it easier to attract foreign investment and finance their debt. However, the dollar’s share of global reserves has declined from 72% in 2000 to approximately 58% in 2025 (IMF COFER data), signalling a gradual diversification trend.
Non-Reserve Currency Status Countries: These countries might need to offer higher interest rates to attract foreign investors, especially if their currency is less widely accepted or considered riskier.
Economic Resilience
Reserve Currency Status Countries: The status can offer a certain level of economic resilience, as these countries have access to a global market for their currency. This can provide a buffer against economic shocks.
Non-Reserve Currency Status Countries: These countries may be more susceptible to economic shocks, particularly if they rely heavily on borrowing in foreign currencies or face difficulties in attracting foreign investment.
Learn how Aerapass supports multi-currency diversification for global institutions
Importance of Prudent Fiscal Governance
It’s crucial to acknowledge that while reserve currency status yields benefits, it doesn’t exempt those countries from the principles of prudent fiscal management. Despite advantages, excessive borrowing can still provoke apprehensions about the trajectory of debt sustainability, investor faith, and economic steadiness. The US experience demonstrates this clearly: at $38.86 trillion in debt and interest costs approaching $1 trillion annually, even the world’s primary reserve currency issuer faces fiscal constraints. CBO projects the debt-to-GDP ratio will reach 120% by 2036 - higher than at any point in the nation’s history.
Consequently, countries enjoying this privilege must proactively safeguard their economic competitiveness, stability, and responsible borrowing practices to guarantee long-term debt sustainability.
In summary, debt sustainability can differ between reserve currency status countries and non-reserve currency status countries due to factors such as borrowing costs, foreign exchange risk, monetary policy flexibility, demand for currency, and economic resilience. Reserve currency status can provide advantages that contribute to more favourable debt dynamics, but it’s essential for all countries to maintain prudent fiscal management practices to ensure the long-term sustainability of their debt. For institutional investors navigating these dynamics, diversification across currency zones and asset classes remains a core risk management strategy.
Summary
Reserve currency status creates a structural privilege in debt sustainability: the US sustains $38.86 trillion in debt (~101% debt-to-GDP) with $970 billion in annual interest costs, while non-reserve currency nations like Sri Lanka, Ghana, and Zambia defaulted and required multi-year restructurings at similar or lower debt levels. The difference lies in borrowing costs, foreign exchange risk, monetary policy flexibility, and access to domestic capital markets. However, reserve currency privilege has limits - the dollar’s reserve share has declined from 72% to 58% since 2000, and CBO projects US debt-to-GDP reaching 120% by 2036. Prudent fiscal governance remains essential for all countries regardless of currency status.
Frequently Asked Questions
What is the US national debt in 2026? US national debt reached $38.86 trillion by March 2026, with a debt-to-GDP ratio of approximately 101%. Interest payments on the debt have reached approximately $970 billion annually - now exceeding spending on both national defence and Medicaid. CBO projects interest costs will surpass $1 trillion in 2026 and the debt-to-GDP ratio will reach 120% by 2036, higher than at any point in US history.
Why can the US sustain high debt but Sri Lanka cannot? The US issues the world’s primary reserve currency, allowing it to borrow in its own currency at low interest rates, eliminate foreign exchange risk, and access the deepest capital markets globally. Sri Lanka borrows in foreign currencies (primarily USD), pays higher interest rates reflecting risk perceptions, and faces devastating currency depreciation during crises that amplifies debt burdens. Sri Lanka’s interest payments consumed 60%+ of government revenue before its April 2022 default, compared to ~16% for the US.
What is a reserve currency and why does it matter? A reserve currency is a foreign currency held in significant quantities by central banks as part of their foreign exchange reserves. The US dollar (58% of global reserves), euro, yen, pound sterling, and Swiss franc serve this role. Reserve currency status provides lower borrowing costs, eliminates FX risk on sovereign debt, and grants greater monetary policy flexibility. It represents the single most important structural advantage in sovereign debt sustainability.
How much does the US pay in interest on national debt? US interest payments reached approximately $970 billion annually by early 2026, nearly triple the 2020 level. This now exceeds spending on national defence and Medicaid. CBO projects interest costs will surpass $1 trillion in 2026 and reach $2 trillion by 2036 as debt levels continue rising and refinancing occurs at higher rates.
Which countries have restructured sovereign debt recently? Three landmark restructurings completed in 2024: Sri Lanka ($12.5B bond exchange, 98% bondholder participation, after April 2022 default), Ghana ($13B through G20 Common Framework, including a Domestic Debt Exchange that imposed losses on local pension funds), and Zambia ($3B bondholder debt under the Common Framework after nearly four years of negotiations). All three lacked reserve currency status and could not monetize their debt or access low-cost domestic borrowing.
References
- IMF. “Deciding When Debt Becomes Unsafe,” Finance & Development, March 2022.
- IMF COFER. Currency Composition of Official Foreign Exchange Reserves, 2025.
- CBO (Congressional Budget Office). Budget and Economic Outlook, 2026-2036 projections.
- S&P Global Ratings. Sovereign credit ratings for US, Japan, UK, France, Sri Lanka, Ghana, Zambia.
- IMF World Economic Outlook. Debt-to-GDP ratios and fiscal projections, 2025-2026.
- IMF Global Sovereign Debt Roundtable. Restructuring process updates, 2024.
- OBR (Office for Budget Responsibility, UK). Fiscal sustainability report, 2025.
The content on this page is produced by Aerapass for general informational purposes only and does not constitute financial advice, investment advice, or any other form of professional advice. Aerapass is a technology platform provider serving financial institutions, wealth managers, and fintech companies. Before making any financial decision, you should consult with a qualified, licensed financial advisor who can take your individual objectives and circumstances into account.
