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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading into a “debt death spiral”, where it has to borrow more and more money to service rising interest costs.
Dalio told the Financial Times that the recent sell-off in the government bond market, coupled with bouts of weak sterling, suggested the market was struggling to absorb the UK's rising borrowing needs since last October's budget.
He said the combination of rising annual interest payments, which already exceeded £100bn a year, and the need to roll over debt at higher borrowing costs, created the risk of a self-reinforcing cycle.
This “seems like a debt death spiral in the making because it will require either more borrowing to service the debt that will have to be serviced, squeeze other spending, or require more taxes,” Dalio said in an interview.
He said the market turmoil “reflects a supply and demand problem” for government bonds. “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 accommodate its borrowing needs, and described dealing with the country's debt burden as the “number one big issue” of President Trump's second term in office.
The global bond sell-off in recent months has pushed up borrowing costs in major economies such as the UK and the US, 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 at 4.93 per cent, amid a global bond sell-off and concern about the UK economy. Since then, yields have regained some ground, reaching 4.66 percent on Monday.
US 10-year bond yields reached 4.62 percent, up one percentage point over the same time frame. Returns move inversely with prices.
The main driver was firmer-than-expected inflation, prompting markets to price in smaller interest rate cuts, but some major investors also expressed concerns about higher levels of borrowing by countries that already carry large debt burdens.
“When you get to the point where you have to borrow money to service the debt and interest rates go up, so that the debt service payments go up, and you need to borrow more money to pay them back, you are in what markets call a recession,” said Dalio, who this month published the first part of His new analysis of sovereign debt crises: The “death spiral.” How do countries go bankrupt?.
“As these risks increase, everyone looks at the need to borrow more money at higher interest, creating (a) self-reinforcing debt spiral.”
The sell-off in sterling and gold has sparked memories of a market crisis in the wake of the 2022 “mini” Budget presented by former Prime Minister Liz Truss. At the time, Dalio wrote that the market decline “indicates inefficiency.”
Investors have largely dismissed the comparisons, partly because the sell-off was not as large or severe, but the government was forced to defend its economic plans this month as borrowing costs rose to their highest level after the financial crisis, while Chancellor Rachel Reeves faced… Calls for resignation.
A Treasury spokesman said: “The government’s commitment to sound fiscal and public finance is non-negotiable,” adding: “The Chancellor has already shown that tough decisions will be made on spending, with the spending review continuing to eliminate waste.”
Dalio called for reducing the government deficit in the United States and the United Kingdom 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 financial year.
Some analysts warned that radical cuts in spending or imposing new taxes would harm countries' economic growth and affect their financial resources.
Dalio agreed that “reducing the budget deficit negatively impacts growth and inflation, (but) it will lead to lower interest rates, and these lower interest rates have a significant stimulating effect while also reducing the budget deficit.”
Dalio stepped down as Bridgewater's president in 2021 but remains a member of the board Previously warned On the risk of rising US debt to Treasury investors. He did not specify a time frame for when what he called the “debt bomb” would explode in heavily indebted countries.
“It's like someone who has a lot of plaque in their arteries that builds up quickly,” he said. Debt payments “increase and pressure other spending and create the risk of part of the board breaking. You can't say exactly when that will happen, but you can say the risks are very high and increasing.”
