The US’ geopolitical brinkmanship over Greenland has thrown its financial ties to the EU into sharp reduction. European powers are contemplating what devices it has to fight US belligerence, together with the “nuclear choice” 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 getting ready doable responses to additional escalation.
One choice was slicing off entry to US markets by the so-called “commerce bazooka.” If triggered, it might reduce off US corporations from the EU market, costing them billions. Another choice is offloading the trillions of {dollars} in US property 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 have been contemplating doable responses. Whereas Denmark deployed particular forces to Greenland, different heads of state prompt the commerce bazooka, which might deny the US entry to EU markets.
Others, together with former Dutch Protection Minister Dick Berlijn, prompt that Europe might use US debt as leverage. Berlijn said, “If Europe decides to dump these bonds, it creates an enormous downside within the US. [The dollar] crashes, excessive inflation. The US voter gained’t like that.”
George Saravelos, Deutsche Financial institution’s chief FX strategist, wrote in a be aware final weekend, “For all its navy and financial power, 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 legislation and affiliate dean at Vanderbilt College, instructed Cointelegraph, “Overseas authorities consumers are typically sticky, that means that they won’t simply transfer their holdings except there’s a critical want for them to take action.”
Moreover, in response to the Monetary Instances, a lot US debt in Europe is just not held by governments themselves, however by personal 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.
Subsequently, even when European powers wished to dump US debt, they’d have to compel these personal 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 state of affairs most likely must escalate a good bit additional earlier than they injury their funding efficiency for political functions.”
Nonetheless, “they might doubtlessly take into consideration opening up the sorts of presidency debt which are thought of most safe as collateral,” mentioned Yadav.
The principle 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.
“Whilst different extremely secure and protected international locations, reminiscent of Germany, start to difficulty debt, their debt markets stay comparatively small, such that it is rather tough 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 would not have the capability to soak up that many US property. 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 Instances, 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 concept there may be the potential for the USD to drop ought to worldwide savers stage a mass retreat from US property, the sheer measurement of US capital markets means that such an exit might not be possible given the restrictions of other markets.”
Stablecoins grow to be main consumers of US debt
One rising main purchaser of US debt is stablecoin issuers.
Based on the GENIUS Act, the US’ landmark laws making a framework for stablecoins, issuers of these property 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 pattern continues, it provides an excellent benefit for US policymakers, nevertheless it additionally deepens the hyperlink between the continuity of stablecoin issuers and that of the power of US Treasury markets to proceed remaining liquid and fashionable,” mentioned Yadav.
Associated: Senate passes GENIUS stablecoin bill amid concerns over systemic risk
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 reducing 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 forestall the issuer from promoting off its securities. It might grow to be bancrupt and in addition considerably influence 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 said, “We’re not 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 properly.
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