China and the United States drove a rapid accumulation of global debt in the first quarter of 2026, a trend that could spread amid war in the Middle East and mounting geopolitical tensions, a major finance industry body said.

Global debt hit a record high of nearly US$353 trillion in the first quarter, according to the Institute of International Finance (IIF), with a US$4.4 trillion rise from January to March, driven largely by government borrowing and marking the fastest increase since the second quarter of 2025.

The impact of the US-Israeli war in Iran on debt markets had so far remained “contained”, but the report’s authors warned it formed part of a broader pattern of “intensifying” geopolitical tensions and armed conflicts since 2020.

“Over time, the longer-term implications are likely to become more apparent – prompting governments and corporates to prioritise supply chain resilience and forge new partnerships and trade routes,” they said in the report released on Wednesday and co-authored by Emre Tiftik, the institute’s global markets and policy director.

“These shifts carry significant fiscal implications, with meaningful consequences for interest rates and inflation dynamics.”

Higher interest rates make new borrowing more expensive and increase payments on some existing debt.

In China, state-owned enterprises were particularly active borrowers in the first quarter of the year, with levels that “significantly outpaced” those of sovereign institutions, according to the report. State-owned firms have historically benefited from relatively easy access to capital.