Global sovereign debt conditions are expected to deteriorate further in 2026 as ongoing geopolitical conflicts and international trade disputes continue to strain government finances worldwide, according to a new analysis from Morningstar DBRS released Tuesday.
Negative Trends Outweigh Positive Developments
The influential ratings agency revealed concerning statistics about current sovereign credit trends. None of the sovereign credits monitored by Morningstar DBRS currently show positive trends, while three are displaying negative trajectories. This marks a significant reversal from the previous year, when six sovereigns demonstrated positive trends and only one showed negative movement.
"Large fiscal imbalances in a number of advanced economies could leave less space for these governments to respond to future downturns," the agency cautioned in its comprehensive report. The analysis further predicted that credit rating upgrades are unlikely to outnumber downgrades in 2026, contrasting with the pattern observed throughout 2025.
Silver Linings Amid Economic Challenges
Despite the generally pessimistic outlook, the report identified several stabilizing factors. Approximately 90% of sovereign credit ratings are expected to remain unchanged over the coming twelve months, providing some measure of predictability for international markets.
The analysis also highlighted that Canada and Germany both maintain fiscal flexibility despite adopting more expansionary budgetary approaches. Both nations possess sufficient economic space to implement looser fiscal policies without immediately jeopardizing their credit ratings, according to Morningstar DBRS analysts.
Trade Policy Impacts and Global Economic Resilience
Global economic systems have demonstrated remarkable resilience throughout 2025, weathering trade policy disruptions better than many experts anticipated. The most significant trade realignment has occurred between the United States and China, where substantial trade dislocations have reshaped international commerce patterns.
Supporting this assessment, the International Monetary Fund revised its global growth projections upward in its October 2025 World Economic Outlook compared to April forecasts. Concurrently, inflation rates have continued to decline across most advanced and emerging economies, approaching central bank targets and prompting monetary authorities to maintain or transition toward less restrictive policy positions.
However, Morningstar DBRS issued specific warnings about protectionist trade policies emerging from the United States. These measures could result in higher average tariff rates for trading partners including Canada, with additional countervailing tariffs possible if mutually acceptable trade agreements cannot be negotiated.
"Global trade policy will likely be a source of continued surprises," the Morningstar DBRS analysts concluded, indicating that market volatility related to trade disputes will probably persist through 2026 and potentially beyond.
