The debt-to-GDP ratio is simultaneously the most important and most misunderstood fiscal indicator. The Reinhart-Rogoff claim that growth collapses above 90% was debunked (the original paper contained a spreadsheet error), but policymakers and markets continue to treat round numbers as meaningful thresholds.
What actually determines debt sustainability is the relationship between three variables: the interest rate on debt, the growth rate of the economy, and the primary fiscal balance (government revenue minus spending, excluding interest payments). When growth exceeds the interest rate, debt ratios can stabilize or decline even with moderate primary deficits. When interest rates exceed growth, even surpluses may not prevent debt spiraling higher.
This framework explains why Japan can sustain 250% debt-to-GDP while Argentina defaults at 80%. Japan borrows in yen at near-zero rates from domestic investors who have nowhere else to put their savings. Argentina borrows in dollars at high rates from international investors who can flee at the first sign of trouble. The headline ratio is less informative than the interest-growth differential and the currency composition of debt.
The post-pandemic landscape has raised debt ratios across the board, but the consequences will diverge dramatically. Advanced economies will likely manage their debt through a combination of financial repression (keeping rates below inflation) and gradual growth. Developing countries with dollar-denominated debt face a much harder path, as rising US rates and dollar strengthening make their debt more expensive to service.