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 service its rising interest costs.
Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with bouts of sterling weakness, suggested that 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 topped £100bn a year, and the need to roll over debt at 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, squeeze out other spending, or require more taxes”, said Dalio in an interview.
The market turbulence “reflects a supply-demand problem” for gilts, he said. “Why else would long-term [yields] rise when there’s an easing [of monetary policy], the exchange rate is going down, and the economy is weak?”
He also said the US is “exhibiting signs” that the market could start to struggle to absorb its borrowing needs, and called getting a handle on the country’s debt burden the “first big issue” for President Trump’s second term in office.
A global bond sell-off in recent months has sent borrowing costs racing higher in big 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 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 anxiety over the UK economy. Yields have since recovered some ground to 4.66 per cent on Monday.
US 10-year yields have reached 4.62 per cent, up one percentage point over the same timeframe. Yields move inversely to prices.
A big driver has been stickier-than-expected inflation, which has led markets to price in shallower rate cuts, but some big investors have also voiced concerns about higher levels of borrowing by countries already carrying large debt burdens.
“When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re 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 Broke.
“As those risks increase, everybody looks at that need to borrow more money at higher interest, which creates [a] self-reinforcing debt deterioration cycle.”
The sell-off in sterling and gilts has evoked memories of the market crisis following former Prime Minister Liz Truss’s ill-fated 2022 “mini” Budget. At the time, Dalio wrote that the market plunge “suggests incompetence”.
Investors have largely dismissed comparisons, partly given the sell-off has not been as large or as sharp, but the government was forced to defend its economic plans this month as its borrowing costs hit a post-financial crisis high, while chancellor Rachel Reeves has faced 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 decisions on spending will be taken, with the spending review to root out waste ongoing.”
Dalio called for US and UK government deficits to be reduced to 3 per cent of GDP. The US deficit is expected to remain above 6 per cent of GDP this year, while the UK’s is set to hit 4.5 per cent this fiscal year.
Some analysts have warned that radical cuts to spending or fresh taxes would damage countries’ economic growth and hit their finances.
Dalio accepted that “cutting the budget deficit is depressing for growth and inflation, [but] it will lead to lower interest rates and those lower interest rates have a big stimulative effect while also reducing the budget deficit”.
Dalio, who stepped down as Bridgewater’s chair in 2021 but remains on the board, has previously warned of the danger of mounting US debt to Treasuries investors. He did not put a timeframe on when what he has termed a “debt bomb” would go off for indebted countries.
“It’s like a person who has a lot of plaque in their arteries that’s building up fast,” he said. Debt payments are “building up and squeezing out other spending and creating the risk of a piece of the plaque breaking off. You can’t tell exactly when that is going to happen, but you can say that the risks are very high and rising.”
Ray Dalio, the billionaire founder of investment firm Bridgewater Associates, has issued a stark warning about the UK’s growing debt levels. In a recent interview, Dalio highlighted the risks of a potential ‘debt death spiral’ for the country if its borrowing continues to rise unchecked.
Dalio pointed to the UK’s mounting national debt, which has surged to over £2 trillion in the wake of the Covid-19 pandemic. He cautioned that unless the government takes swift action to rein in its borrowing, the country could face a series of damaging consequences, including rising interest rates, inflation, and a weakening currency.
The billionaire investor urged policymakers to prioritize fiscal responsibility and adopt measures to reduce the UK’s debt burden. He emphasized the importance of balancing short-term stimulus efforts with long-term debt sustainability to avoid a downward spiral that could threaten the country’s economic stability.
Dalio’s warning comes at a critical time for the UK, as the government grapples with the economic fallout from the pandemic and seeks to chart a path towards recovery. His insights serve as a timely reminder of the importance of prudent financial management in safeguarding the nation’s financial future.
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