Debt service is what a state pays its creditors each year: the interest, and the repayment of capital. When it swells, it "crowds out" other spending: the money that pays the debt no longer pays the school, the hospital or the road. That is the crowding-out effect.
1 What are we talking about?
What a debt costs, each year.
Definition
Interest plus principal
Debt service is not the same as the size of the debt. It is the annual flow: the interest due, plus the share of capital that falls due. A country can have a stable debt and a service that explodes, if rates rise or its currency depreciates against debt in foreign currency. Service is thus the real weight felt, year after year.
2 Debt service
Three things make it swell.
What weighs on the service
①
The rate. The higher the borrowing rate, the heavier the interest. A poor country often borrows two to four times dearer than a rich one.
②
The currency. Foreign-currency debt swells when the national currency depreciates: it takes more local currency to pay the same dollar.
③
The profile. Bunched maturities force frequent refinancing, at the markets' mercy, sometimes at the worst moment.
3 The crowding-out
Money is spent only once.
The mechanism
When debt drives out the rest
A state's fiscal space is finite. Every euro spent on interest is a euro that will not go to a teacher, a vaccine, a bridge: that is fiscal crowding-out, debt service that "crowds out" productive spending. At the extreme, countries spend more on interest than on health or education. There is also financial crowding-out: a massive public debt can push up rates and discourage private investment.
4 Good or bad debt
It all depends on the use.
The nuance
Debt is not bad in itself. Borrowed to invest, in roads, schools, energy, it can repay itself through the growth it generates: that is "good debt," or productive debt. Borrowed to consume, or poorly used, it does not create the income that would repay it. The question is not "should one borrow," but "for what" and "at what cost." When service crowds out investment, debt devours its own capacity to repay.
5 Takeaways
To remember.
✓
Debt service is the interest plus the principal paid each year.
✓
It swells with the rate, currency depreciation and bunched maturities.
✓
The crowding-out: what pays the debt no longer pays health, school or investment.
This notion illuminates an analysis
First published: 19 June 2026