Stockholm; September 2026: GLOBAL military expenditure reached $2.9tn in 2025, rising for an 11th consecutive year and absorbing 2.5% of world output, according to the Stockholm International Peace Research Institute. Yet defence is becoming more than a budget line. Governments increasingly treat it as insurance against geopolitical risk, industrial policy, a technology programme and an instrument of alliance management. Fiscal policy, industrial strategy and security doctrine are beginning to overlap. An armed economy is taking shape around that fusion. But insurance is not quite the right analogy. Military spending can change the risk it is intended to reduce. One state’s effort to protect itself may prompt another to spend more. The cost of protection is partly endogenous. What matters is how the effort to buy security changes public finances, market prices and the behaviour of other states.
History gives reason to take this possibility seriously. In the 19th century, military capacity depended on taxation, sovereign credibility and access to bond markets. Britain’s advantage over France during the Napoleonic wars rested partly on its borrowing capacity. During the world wars, central and commercial banks supported government securities markets and channelled domestic savings towards the state. War finance narrowed the boundaries between monetary policy, debt management and national strategy.
This century will not reproduce that model. Central bank independence is more deeply embedded, and direct monetary financing is constrained in many jurisdictions. Yet security commitments still have to be converted into financing capacity. This time, mobilisation is likely to run through bonds, public guarantees, banks, private credit and institutional investors. The state still stands behind the system as borrower, purchaser, guarantor and allocator of strategic risk.
The model is already taking institutional form. NATO’s 2025 Hague commitment asks allies to move towards at least 3.5% of gross domestic product for core defence and up to 1.5% for broader defence and security-related investment by 2035. In July 2026, Canada and eight partners declared their intention to establish a Defence, Security and Resilience Bank to mobilise capital and provide long-term finance. Four European countries also advanced a Multilateral Defence Mechanism for joint procurement. These initiatives would sit alongside the European Union’s €150bn Security Action for Europe loan instrument.
New institutions are taking shape while questions of fiscal capacity and incidence remain unresolved. Pooled borrowing can reduce costs and guarantees can widen access to credit – neither changes who ultimately bears the obligation. Commitments outside headline debt can still create contingent liabilities for the sovereign. Callable capital, guarantees and advance purchase arrangements remain potential claims on future fiscal resources. Off the balance sheet is not off the ledger.
Much of the public
financing will appear as sovereign or supranational issuance, including where
guarantees mobilise private capital. Defence will not be the only source of new
supply. Ageing, infrastructure, climate investment and refinancing needs also
matter. Its significance is that it may become a persistent and politically
protected source of borrowing. Private investors will absorb more of that
supply with less help from central banks. The European Central Bank’s May 2026
Financial Stability Review identifies defence-related deficits as one factor
increasing issuance needs, rollover exposure and interest burdens. Research on
preferred habitat shows that a larger supply of long-dated government bonds can
raise term premia when investors’ capacity to bear duration risk is limited.
The effect is not automatic, but the mechanism is established.
International
Monetary Fund evidence gives the fiscal channel scale. In a typical large
defence spending boom, outlays rise by about 2.7 percentage points of GDP over
two and a half years, with roughly two-thirds financed through higher deficits.
Debt managers then face harder choices over maturity, refinancing risk and
cost. The Organisation for Economic Co-operation and Development adds an
important qualification. Longer-term effects depend on financing, import
content, domestic capacity, procurement quality and technological spill overs.
These choices are
distributed unevenly. Reserve currency issuers and highly rated sovereigns with deep markets can finance a security premium more readily. Countries with
high debt, shallow markets or foreign currency exposure cannot. In 2024, 21 of 89 low- and
middle-income countries spent more than 20% of their government revenue on interest payments, and 14 spent
more than 25%, according to IMF data. For many constrained sovereigns, additional defence outlays
may generate few domestic industrial benefits while competing with health,
education, climate resilience and debt service. This is the spillover that a
transatlantic debate can miss. Additional issuance by core sovereigns can
affect benchmark yields and term premia. Large regional issuers can change
portfolio allocations and emerging market pricing. Financing conditions may tighten
for countries whose security choices had little to do with the original
increase.
Corporate finance may change, too. Defence manufacturers and firms in
space, cybersecurity, artificial intelligence and critical minerals will
require more funding from banks, private credit and institutional investors. Strategic
value does not replace risk, return and liquidity. The state is changing how
risk and return are formed through contracts, guarantees, subsidies, regulation
and public balance sheets. For public investors, strategic value can be
incorporated directly into the objective. For private investors, it enters
through procurement commitments, regulatory eligibility, guarantees and tax
incentives.
A private defence
company may depend on multi-year contracts, state funded research, export
licences or advance purchase commitments. Its liabilities remain private, but
its cash flows may be partly underwritten by sovereign policy. Expectations of
continuing support may affect cash flow visibility, ratings, spreads and access
to finance without turning the firm into a quasi-sovereign credit. The familiar
danger remains. Private returns can rest on public risk while the contingent
liability is only partly recognised. Credit markets are already responding. The
European Investment Bank has expanded loans and guarantees for defence supply
chains through commercial banks. The European Commission has clarified that the
European Union’s sustainable finance framework does not prevent investment in
the sector. Policy is changing the boundary around investable strategic
activity.
The links between
banks and private markets matter here. A private credit fund may lend to a
supplier whose cash flow depends on a prime contractor, whose order book
depends on a public programme financed through sovereign issuance. Legal claims
are dispersed, but the risks remain correlated with the state. Guarantees can
correct market failures. They can also weaken screening or move exposures
beyond the clearest part of the regulatory perimeter. This is not yet financial
repression. Historically, repression involved captive investors, directed
credit, administered returns and capital controls. Voluntary investment
supported by transparently priced guarantees remains an industrial policy.
Mandates that create captive demand or suppress returns would move closer to
repression. Between those points lies a security-orientated financial
direction.
The macroeconomic case is distinct from the security case. Personnel, munitions, imported equipment and dual-use research have different effects. An imported system may strengthen deterrence while adding little domestic capital formation. Dual-use research may raise productivity while drawing scarce skills and finance from civilian activity. The economic test is whether spending produces useable security at a defensible economic and financial cost. That test becomes harder as the security perimeter widens. Satellites, undersea cables, ports, payment systems, energy grids and critical minerals are simultaneously civilian, commercial and strategic.
Space, the seabed
and an increasingly accessible Arctic are becoming domains of investment and
rivalry. As the category expands, almost any infrastructure programme can be
labelled resilience and placed beyond ordinary scrutiny. That wider definition
of security has an opportunity cost. Capital directed towards deterrence and
resilience is unavailable for other forms of security. Peace also requires
finance. Diplomacy, mediation, arms control, peacekeeping and conflict
prevention sit outside most defence budgets. Climate adaptation and
institutional capacity may matter more where the principal threats are drought,
displacement, debt distress or state fragility.
Yet deterrence is
financed more visibly than prevention. Global military expenditure in 2025 was
more than 16X the official development assistance reported by OECD Development
Assistance Committee members and associates, $2.9tn compared with $174.3bn. The
latter fell by 23.1%, the largest annual contraction on record. These figures
are not directly comparable, and military spending cannot simply be converted
into aid. But they still reveal an asymmetry. Institutions preparing for
conflict receive multi-year plans, while many intended to prevent it operate
under recurring uncertainty. Capital reallocation is visible not only in what
receives finance, but in what does not.
This is not yet a
new financial regime. But the signs are worth watching. They include sovereign
and supranational issuance, contingent liabilities, strategic corporate credit,
links between banks and private markets, prudential classifications and spill
overs to constrained sovereigns. One test will be the scale and treatment of
defence-related commitments. By the end of the decade, defence-linked issuance
could form a meaningful share of sovereign and supranational bond supply.
Guarantees and advance commitments may remain outside headline debt measures.
The shift could take place without a single formal decision. Financial regimes
often change not by announcement, but by accumulation. The questions are not
only financial. What counts as defence? What counts as resilience? Who will
govern investment in space, the seabed and the Arctic? How will governments
divide scarce fiscal capacity among deterrence, resilience and prevention? Who
gains from state support? Who pays through a higher cost of capital?
Accounting may
lag. Governance may lag too. If they do, the armed economy will take shape
before its risks are visible. By then, patterns of borrowing, lending and
risk-bearing may already be entrenched. So many of the investments the world
has chosen not to make.
Team Maverick.
