Bridgewater founder Ray Dalio warns of UK ‘debt death spiral’

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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be headed for a “debt death spiral” as it has to borrow more money to pay for its rising interest costs.

Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with severe weakness, suggested the market was struggling to accommodate the UK’s higher borrowing needs since last October’s budget.

He said the combination of £100 billion a year in annual interest payments and the need to carry debt with high borrowing costs created a self-perpetuating cycle.

This “looks like an ongoing debt death spiral because servicing the debt requires more borrowing, more spending or more taxes,” Dalio said in an interview.

The market turmoil “reflects a supply-demand problem” for gilts, he said. “Why would long-run (output) increase when there is contractionary (monetary policy), the exchange rate is depreciating and the economy is weakening?”

He also said the U.S. is showing signs that the market may be struggling to absorb its borrowing needs, and that controlling the nation’s debt burden is the “first big issue” for President Trump’s second term.

Although central banks are cutting interest rates, a global bond selloff in recent months has pushed up borrowing costs in major economies such as the United Kingdom and the United States.

UK 10-year borrowing costs rose to 16-year from 3.75 per cent in mid-September to 4.93 per cent earlier this month, amid global bond selling and worries about the UK economy. The yield reached 4.66 percent on Monday.

U.S. 10-year yields hit 4.62 percent, up one percentage point from the same timeframe. Products, on the contrary, move to prices.

A big driver has been stickier-than-expected inflation, which has sent markets slightly undervalued, but some big investors have expressed concern about high levels of debt in countries that already carry huge debt burdens.

“When you get to the point where you have to borrow money to service the debt, and you have to borrow more money to service the debt because interest rates are going up, you have to borrow more money to pay it off,” said Dalio, who published the first installment of his new analysis of sovereign debt crises this month. How countries are destroyed.

“As those risks increase, everyone sees the need to borrow more money at higher interest rates, which (a) creates a self-reinforcing cycle of debt defaults;

Selling of sterling and gilts reminded former prime minister Liz Truss of a market crisis following a “minimum” 2022 budget. At the time, Dalio wrote that the market’s decline “suggests incompetence.”

Investors have largely dismissed the comparison, partly because the sell-off is not as big or sharp, but the government was forced to defend its economic plans this month as borrowing costs hit record levels in the wake of the post-financial crisis, which Chancellor Rachel Reeves has faced. Calls to leave.

A Treasury spokesman said: “The government’s commitment to financial rules and sound public finances is non-negotiable,” adding, “The Chancellor has shown that tough decisions are taken on spending, and a spending review is underway to eliminate waste.”

Dalio has called for the US and UK government deficits to be reduced to 3% of GDP. The US deficit is expected to remain above 6% of GDP this year, while the UK’s is expected to reach 4.5% this fiscal year.

Some analysts have warned that spending cuts or new taxes could hurt countries’ economic growth and hurt their currencies.

“Deficit reduction is a disincentive for growth and inflation, (but) low interest rates will have a big stimulatory effect on reducing the budget deficit,” Dalio admitted.

In the year Dalio, who stepped down as Bridgewater’s chairman in 2021, remains on the board; He warned earlier The risk of increasing US debt to Treasury investors. He described it as a “debt bomb” and did not set a time frame for the debts owed to debtor countries.

“It’s like a person with a lot of plaque in their arteries, it builds up quickly,” he said. Debt payments “increase and squeeze other costs and create the risk of a piece of pavement breaking. While you cannot know exactly when this will happen, you can say that the risk is very high and increasing.