Ray Dalio, founder of hedge fund Bridgewater Capital, warned that the UK economy was at risk of a “debt death spiral” following the recent bout of bond market instability.
In an interview with the Financial Times, Dalio warned that the government faced the prospect of having to borrow more and more from financial markets in order to service its existing debt.
“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,” he said.
Dalio warned that markets were struggling to digest the UK’s extra debt issuance in the wake of October’s Budget.
Government debt issuance is set to reach £297bn this fiscal year, the second highest level on record, even while interest costs remain at their highest levels in years.
The Treasury had to pay over £100bn to service its debt in the 2024 fiscal year. The Office for Budget Responsibility expects debt servicing costs to hit around £110bn by 2028-29.
“(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.”
“As those risks increase, everybody looks at that need to borrow more money at higher interest, which creates (a) self-reinforcing debt deterioration cycle,” he said.
Bond yields, which reflect the cost of government borrowing, have increased all over the world in the recent months, driven both by fears about persistent inflation and fears about national debt.
The yield on the 10-year gilt hit a post-financial crisis high of 4.93 per cent in January, up from 3.75 per cent in mid-September, although it has recovered since then.
Yields on US bonds have also increased, with the yield on the 10-year Treasury rising to around 4.57 per cent from 3.63 per cent in mid-September.
A Treasury spokesperson said the government’s “commitment to fiscal rules and sound public finances is non-negotiable”.
