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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading for a “debt death spiral”, in which it has to borrow more and more money to pay its rising interest costs.
Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with bouts of weakness in the pound, suggested the market was struggling to absorb Britain’s higher borrowing needs since last October’s budget.
The combination of rising annual interest payments, which have already topped £100bn a year, and the need to repay debt with higher borrowing costs created the risk of a self-reinforcing cycle, he said.
This “looks like a debt death spiral in the making because it will either require more borrowing to service the debt that will have to be serviced, crowd out other spending, or require more taxes,” Dalio said in an interview.
The market turbulence “reflects a supply and demand problem” for gilts, he said. “Why else would long-term [yields] rise when yielding occurs [of monetary policy]the exchange rate is falling and the economy is weak?”
He also said the US was “showing signs” that the market may struggle to absorb its borrowing needs and called tackling the country’s debt burden “the first big issue” for President Trump’s second term.
A global bond selloff in recent months has pushed up borrowing costs in major economies such as the UK and US, even as central banks continue to cut interest rates.
The UK’s 10-year borrowing costs rose from 3.75 percent in mid-September to a 16-year high of 4.93 percent earlier this month, amid a global bond selloff and concerns about the UK economy. Yields have since recovered slightly to 4.66 percent on Monday.
US 10-year yields reached 4.62 percent, which is one percentage point higher compared to the same time frame. Yields move inversely with prices.
The main driver was better-than-expected inflation, which led markets to shallower price cuts, but some big investors also expressed concern about higher borrowing levels by countries already carrying heavy debt burdens.
“When you get to the point where you have to borrow money to pay off the debt, and interest rates go up, so the debt payments go up, so you have to borrow more money to pay it off, you’re in what the markets call a death spiral,” said Dalio, who this month published the first part of his new analysis of the sovereign debt crisis, How countries go bankrupt.
“As those risks increase, everyone is looking at that need to borrow more money at a higher interest rate, which creates [a] a self-reinforcing cycle of debt deterioration.”
The sell-off in sterling and gilts brought back memories of the market crisis following former prime minister Liz Truss’s ill-fated “mini” budget for 2022. Dalio wrote at the time that the market’s decline “suggests incompetence.”
Investors have largely dismissed the comparisons, partly because the sell-off has not been as big or sharp, but the government was forced to defend its economic plans this month as its borrowing costs hit post-financial crisis highs, while Chancellor Rachel Reeves faces calls for resignation.
A Treasury spokesman 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 and a spending review to stamp out waste is underway. “
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 percent of GDP this year, while the UK deficit is expected to reach 4.5 percent this fiscal year.
Some analysts have warned that radical spending cuts or new taxes will hurt countries’ economic growth and their finances.
Dalio accepted that “reducing the budget deficit is depressing for growth and inflation, [but] this will lead to lower interest rates, and these lower interest rates have a great stimulating effect, and at the same time reduce the budget deficit”.
Dalio, who stepped down as Bridgewater’s chairman in 2021 but remains on the board, forewarned due to the threat of rising US debt to Treasury investors. He did not put a time frame on when what he called a “debt bomb” would explode for indebted countries.
“It’s like a person who has a lot of plaque in their arteries that builds up quickly,” he said. Debt payments “accumulate and crowd out other spending and create the risk that a piece of the board will break off. You can’t say exactly when that will happen, but you can say that the risks are very high and growing.”
