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

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The billionaire founder of hedge fund Bridgewater Associates, Ray Dalio, has warned that the UK could be headed for a “debt death spiral” where it will have to borrow more and more money to service its rising interest rates.

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

He said the combination of rising annual interest payments, which had already topped £100 billion a year, and the need to roll over debt with higher debt replacement costs created the risk of a self-perpetuating cycle.

This “looks like a debt death spiral because it’s either going to require more borrowing to service the debt, or it’s going to require other spending, or it’s going to require more taxes,” Dalio said in an interview.

He said the market turmoil “reflects a supply-demand problem” for gilts [yields] rise when there is slack [of monetary policy]the exchange rate is falling and the economy is weak.”

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

A global bond selloff has pushed up borrowing costs in major economies such as Britain and the US in recent months, even as central banks continue to cut interest rates.

Britain’s 10-year borrowing costs rose to a 16-year high of 4.93 percent earlier this month from 3.75 percent in mid-September amid a sell-off in global bonds and worries about the U.K. economy.The yield recovered somewhat to 4.66 percent on Monday.

The US 10-year yield reached 4.62 percent, up one percentage point over the same period.Yields are moving inversely to prices.

The main driver was stickier-than-expected inflation, which led markets to price lower interest rates, but some major investors also expressed concern about higher levels of borrowing by already heavily indebted countries.

“When you get to the point where you have to borrow money to service the debt, and interest rates go up so the debt service fees go up, so you have to borrow more money to pay them off, you’re in what the markets call death. spiral,” said Dalio, who published the first part of his new analysis of sovereign debt crises this month. How countries break.

“As those risks increase, everyone looks at the need to borrow more money at higher interest rates, which creates; [a] a self-perpetuating debt-worsening cycle’.

The sell-off in sterling and gold evoked memories of the market crisis following former prime minister Liz Truss’s ill-fated 2022 “mini” budget, with Dalio writing at the time that the market’s decline “suggests inaction”.

Investors have largely dismissed the comparisons, partly because the sell-off has not been as big or dramatic, but the government was forced to defend its economic plans this month as borrowing costs hit post-financial crisis highs, while Chancellor Rachel Reeves said: face down calls for his resignation.

A Treasury spokesman said the government’s “adherence to fiscal rules and sound public finances is undisputed”, adding: “The chancellor has already indicated that tough spending decisions will be taken, and a spending review is ongoing to eliminate waste.”

Dalio has called for the US and UK government deficits to be reduced to 3 percent of GDP this year, with the US deficit 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 would hurt countries’ economic growth and hurt their finances.

Dalio acknowledged that “deficit reduction is a drag on growth and inflation, [but] it will lead to lower interest rates, and those lower interest rates will have a big stimulatory effect while reducing the budget deficit.”

Dalio, who is stepping 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 give a timetable for when what he called a “debt bomb” would go off for indebted countries.

“It’s like a person with a lot of plaque in their arteries,” he said. Debt payments “create and drain other costs and create a risk of a piece of plaque coming off. You can’t tell when it will.” is going to happen, but you can tell that the risks are very high and growing.”