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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading towards a “debt death spiral”, in which it would have to borrow more and more money to cope with rising interest costs.
Dalio told the Financial Times that the recent sell-off in the government bond market, coupled with bouts of weakness in the pound, suggested the market was struggling to absorb the UK’s higher borrowing needs since last October’s budget.
The combination of rising annual interest payments, which have already exceeded £100 billion a year, and the need to refinance debt at higher borrowing costs, has created the risk of a cycle that is self-reinforcing, he said.
This “looks like a debt death spiral in the making, because it will either require more borrowing to service the debt that needs to be repaid, or a reduction in other spending, or more taxes,” Dalio said in an interview.
The market turmoil “reflects a supply and demand problem” for gilts, he said. “Otherwise, why would long-term yields rise when there is easing (of monetary policy), the exchange rate is falling and the economy is weak?”
He also said the United States is “showing signs” that the market may begin to struggle to absorb its borrowing needs, and called containing the country’s debt burden the “first big problem” of President Trump’s second term.
The global sell-off in bonds in recent months has driven up borrowing costs in major economies like the United Kingdom and the United States, even as central banks continue to cut interest rates.
UK 10-year borrowing costs rose from 3.75 per cent in mid-September to a 16-year high earlier this month of 4.93 per cent, amid a global sell-off in bonds and anxiety about the British economy. Yields have since regained ground to 4.66 percent on Monday.
US 10-year yields reached 4.62 percent, up one percentage point over the same period. Yields move inversely to prices.
One of the main factors has been higher-than-expected inflation, which has led markets to anticipate smaller rate cuts, but some large investors have also expressed concerns about higher borrowing levels from the countries already heavily in debt.
“When you get to the point where you have to borrow money to pay off the debt and interest rates rise, so debt service payments go up, so you have to borrow more money to pay them , you find yourself in what the markets call a death spiral,” said Dalio, who this month published the first part of his new analysis of sovereign debt crises, How countries go bankrupt.
“As these risks increase, everyone realizes the need to borrow more money at higher interest rates, which creates (a) cycle of debt deterioration that is self-sustaining. feeds. »
The massive sell-off in sterling and gilts was reminiscent of the market crisis that followed former Prime Minister Liz Truss’s ill-fated 2022 “mini” budget. At the time, Dalio wrote that the market drop “suggests incompetence.”
Investors have largely rejected the comparisons, partly because sales have not been as big or as sharp, but the government has been forced to defend its economic plans this month as its borrowing costs hit a record low. summit since the financial crisis, while Chancellor Rachel Reeves confronted calls to resign.
A Treasury spokesperson said the government’s “commitment to fiscal rules and sound public finances is non-negotiable”, adding: “The Chancellor has already shown that tough spending decisions will be made , with a review of spending to eliminate ongoing waste. »
Dalio called for the US and UK government deficits to be reduced to 3 percent of GDP. The US deficit is expected to remain above 6 per cent of GDP this year, while the UK’s is expected to reach 4.5 per cent this financial year.
Some analysts have warned that sweeping spending cuts or new taxes would hurt countries’ economic growth and hurt their finances.
Dalio admitted that “reducing the budget deficit is depressing for growth and inflation, (but) it will lead to lower interest rates and these lower interest rates have a great stimulative effect while also reducing the budget deficit”.
Dalio, who stepped down as chairman of Bridgewater in 2021 but remains a board member, said previously warned of the danger of an increase in American debt for investors in Treasury bonds. He has not set a deadline for the explosion of what he calls a “debt bomb” for indebted countries.
“It’s like a person who has a lot of plaque in their arteries and it builds up quickly,” he said. Debt payments “pile up and crowd out other expenses and create the risk of a piece of the plate breaking off.” We cannot say exactly when this will happen, but we can say that the risks are very high and increasing.