Debt & the risk premium
Debt is cheap while it's small, but the bond market demands a steeper risk premium the moment your debt passes half your GDP — and past 100% it starts actively grinding down stability and output.
How it works
Interest is a risk-premium curve. The base rate is 2.4%, and for every point your debt-to-GDP ratio exceeds 50%, the rate climbs steeply (×0.045 per point of excess), all capped at 8%. The whole rate is multiplied by a credit stigma of 1.8 for four years after a default, so a default makes future borrowing brutally expensive.
Interest is paid weekly on the outstanding debt (reduced up to ~12% by fiscal tech). If your treasury runs dry, the shortfall converts directly into new debt — the classic spiral where interest feeds more borrowing feeds more interest.
Cross the 100%-of-GDP line and a debt crisis kicks in: severity scales with how far past GDP you are, shaving stability (−severity × 0.22) and even nudging GDP down each cycle. A strategic default wipes 90% of debt in one stroke, but detonates a 4-year credit stigma, +6 inflation, and heavy stability/approval/reputation damage.
Formulas
rate = min(8%, (2.4% + max(0, debt/GDP − 50%) × 4.5%) × creditStigma)creditStigma = 1.8 for 4 years (48×4 ticks) after a default, else 1debtInterest = debt × rate × (1/12) × (1 − fiscalTech × 0.12)severity = min(1.2, (debt/GDP − 1)/1.5); stability −= severity × 0.22; GDP ×= (1 − severity × 0.0006)debt ×= 0.10 (90% wiped); inflation += 6; stability −= 12Key numbers
How to play
- ▸Keep debt under 50% of GDP to enjoy the flat 2.4% base rate — every point above that steepens the curve toward the 8% ceiling.
- ▸Never let the treasury hit zero in a downturn: shortfalls silently become debt and can start the interest spiral.
- ▸Fiscal tech cuts interest by up to ~12% — a quiet but real relief when your debt is large.
- ▸Default is a genuine last resort: 90% relief is tempting, but the 4-year ×1.8 stigma plus +6 inflation and stability damage can be worse than the debt itself.