Foreign Ownership of Government Debt

Across all the G10 and EM, Denmark has seen the biggest rise in foreign ownership

This week I’ve been writing about how difficult it is for countries - especially highly indebted ones - to finance large budget deficits. Markets are sick of fiscal policy that’s out of control across so many countries and are demanding higher long-term yields as compensation for the risk that high debt levels will be inflated away. Upward pressure on yields is also one reason central banks are ending quantitative tightening (QT) and - in the case of the Fed - about to revert back into balance sheet expansion.

There’s one “get out of jail” free card in all this, which is foreign demand. If you can convince foreigners to buy your debt, you can have low yields even if your debt is high. In the old days, the way you’d do this was by running virtuous fiscal policy and doing structural reforms. These days, you commandeer your central bank, which Spain and Italy did in the Euro zone. ECB actions to cap yields in 2022 and the introduction of the TPI anti-fragmentation tool unleashed a massive wave of foreign inflows, such that yields have fallen despite high debt levels.

Foreign inflows thus offer countries a degree of immunity in a difficult global setting. In today’s post, I look at how foreign ownership of government debt has evolved from 2019 (before the COVID debt splurge) to now. I do this for 40 advanced and emerging market (EM) countries. Denmark has the biggest rise in foreign ownership, consistent with the idea that markets are gravitating towards low-debt safe havens (Denmark’s government debt is 30 percent of GDP). Greece has seen the biggest drop in foreign ownership across all the countries I look at over this time frame.

The horizontal axis in the chart above shows IMF data on foreign ownership of government debt in Q2 2025 (the latest data point available). The vertical axis shows the same thing in Q4 2019, i.e. before COVID hit. Countries below and to the right of the dotted diagonal line have seen foreign ownership rise over this time frame, while countries above and to the left have seen it fall. I’ve colored the G10 in blue, the Euro zone in red and EM in black. Several points are worth noting. First, Denmark has seen the biggest rise in foreign ownership, consistent with markets gravitating to low-debt economies in their search for safe havens. Second, Greece has seen the biggest fall in foreign ownership, a reminder that foreign investor confidence in high-debt countries remains low, regardless of ECB actions. Third, EM has seen very large falls in foreign ownership. There’s obviously idiosyncratic stories like Russia (RU), but this is a much broader phenomenon that probably stems from the 20 year rise in the Dollar, which weakened demand for EM local currency debt. That said, South Korea (KR), Hungary (HU) and Chile (CL) have seen foreign ownership increase, so there are exceptions.

The fact that most countries are above and to the left of the diagonal means - in a world awash in debt - global investors are retrenching at home. My guess is that it’ll become harder to lure foreign inflows into government debt going forward.