The USA’ geopolitical brinkmanship over Greenland has thrown its financial ties to the EU into sharp aid. European powers are contemplating what devices it has to fight US belligerence, together with the “nuclear possibility” of offloading US debt.
The tone has shifted after a supposed “framework of a deal” at Davos, and US ambitions to take over Greenland have cooled, for now. However EU heads of state are nonetheless making ready attainable responses to additional escalation.
One possibility was slicing off entry to US markets via the so-called “commerce bazooka.” If triggered, it could reduce off US corporations from the EU market, costing them billions. An alternative choice is offloading the trillions of {dollars} in US belongings held in Europe.
However questions stay concerning its feasibility, as dumping might drastically change the worldwide financial panorama. It might even have knock-on results for the US monetary system’s publicity to stablecoins.
Can the EU really dump US debt?
Previous to Jan. 21, European leaders had been contemplating attainable responses. Whereas Denmark deployed particular forces to Greenland, different heads of state recommended the commerce bazooka, which might deny the US entry to EU markets.
Others, together with former Dutch Protection Minister Dick Berlijn, recommended that Europe might use US debt as leverage. Berlijn mentioned, “If Europe decides to dump these bonds, it creates a giant downside within the US. [The dollar] crashes, excessive inflation. The US voter received’t like that.”
George Saravelos, Deutsche Financial institution’s chief FX strategist, wrote in a observe final weekend, “For all its navy and financial energy, the US has one key weak spot: it depends on others to pay its payments by way of giant exterior deficits.”
Saravelos mentioned that the US at the moment owns $8 trillion in US bonds and equities, which is “twice as a lot as the remainder of the world mixed.”
However can Europe really offload this debt? There are each questions of how the EU might compel a sale and, in a world that’s more and more de-dollarizing, who potential consumers are.
Yesha Yadav, a professor of regulation and affiliate dean at Vanderbilt College, informed Cointelegraph, “International authorities consumers are usually sticky, that means that they won’t simply transfer their holdings except there’s a critical want for them to take action.”
Moreover, based on the Monetary Occasions, a lot US debt in Europe is just not held by governments themselves, however by non-public entities like pension funds, banks and different institutional traders. Yadav famous that hedge funds within the UK, Luxembourg and Belgium have emerged as main consumers of US Treasurys.
Due to this fact, even when European powers wished to dump US debt, they’d must compel these non-public consumers to promote. Yadav mentioned that it “doesn’t appear doubtless within the close to time period that European governments might impose restrictions on hedge funds shopping for US Treasurys.”
SocGen’s chief FX strategist, Equipment Juckes, wrote, “The scenario in all probability must escalate a good bit additional earlier than they harm their funding efficiency for political functions.”
Nevertheless, “they could probably take into consideration opening up the sorts of presidency debt which might be thought-about most safe as collateral,” mentioned Yadav.
The primary downside is that there aren’t quite a lot of options to US debt as a risk-off funding. Treasurys nonetheless boast a “risk-free” standing and usually are extremely liquid.
“At the same time as different extremely secure and protected international locations, corresponding to Germany, start to problem debt, their debt markets stay comparatively small, such that it is vitally troublesome to check them ever taking the place of the US Treasury market,” mentioned Yadav.
There’s additionally a paucity of potential consumers. China has been scaling again the tempo of its US debt purchases, Yadav famous.
Asian consumers do not need the capability to soak up that many US belongings. The market capitalization of the MSCI All-Nation Asian index, which tracks giant and mid-cap shares throughout growing and rising markets in Asia, is roughly $13.5 trillion. Per the Monetary Occasions, the FTSE World Authorities Bond Index is about $7.3 trillion.
Rabobank’s analysts wrote, “Whereas the US’s giant present account deficit means that in idea there may be the potential for the USD to drop ought to worldwide savers stage a mass retreat from US belongings, the sheer dimension of US capital markets means that such an exit will not be possible given the constraints of different markets.”
Stablecoins turn out to be main consumers of US debt
One rising main purchaser of US debt is stablecoin issuers.
In keeping with the GENIUS Act, the US’ landmark laws making a framework for stablecoins, issuers of these belongings working within the nation should have {dollars} and US Treasurys in reserve to again their cash.
“That [stablecoin issuers] are rising as quick as they’re implies that their want for Treasurys is correspondingly excessive. To the extent that this development continues, it affords an incredible benefit for US policymakers, but it surely additionally deepens the hyperlink between the continuity of stablecoin issuers and that of the power of US Treasury markets to proceed remaining liquid and well-liked,” mentioned Yadav.
Associated: Senate passes GENIUS stablecoin invoice amid issues over systemic threat
The proliferation of stablecoin issuers as a purchaser for US debt doesn’t come with out its dangers. This, mixed with fewer consumers of US debt, significantly within the occasion of the EU dumping and even considerably lowering its publicity, might spell hassle for US Treasury markets.
Yadav and Brendan Malone, who previously labored in funds and clearing on the Federal Reserve Board, have beforehand famous liquidity shocks in US debt markets, each in March 2020 and April 2025.
Within the occasion of a run on stablecoin issuers, this lack of liquidity and rising lack of counterparties to promote to might stop the issuer from promoting off its securities. It might turn out to be bancrupt and in addition considerably affect the credibility of US Treasury markets.
Financial and navy escalation in an more and more multi-polar world has created rifts between former allies. Whereas there may be hope for a dialogue between the EU and US, Latvian President Edgars Rinkēvičs mentioned, “We aren’t but out of the woods [..] Are we in an irreversible rift? No. However there’s a clear and current hazard.” The hazard seems not solely to Europe and Greenland’s sovereignty, however to US debt markets as effectively.
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