What makes a heavily indebted country’s finances become dangerous fastest?
Answer: Interest costs rise faster than revenues.
Explanation:
A country can live with a large debt for surprisingly long periods, provided its income grows fast enough to keep servicing it. The danger comes when interest costs rise faster than government revenues: more tax income gets swallowed simply paying interest on old borrowing, leaving less for pensions, healthcare, defence and everything else. Governments then face increasingly unpleasant choices – cut spending, raise taxes, borrow even more, inflate the debt away, or eventually restructure it.