America’ 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 potential responses to additional escalation.
One possibility was reducing off entry to US markets by means of the so-called “commerce bazooka.” If triggered, it will minimize off US corporations from the EU market, costing them billions. An alternative 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 had been contemplating potential responses. Whereas Denmark deployed particular forces to Greenland, different heads of state urged the commerce bazooka, which might deny the US entry to EU markets.
Others, together with former Dutch Protection Minister Dick Berlijn, urged that Europe might use US debt as leverage. Berlijn stated, “If Europe decides to dump these bonds, it creates an enormous drawback 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 notice final weekend, “For all its army 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 stated that the US presently 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 patrons are.
Yesha Yadav, a professor of legislation and affiliate dean at Vanderbilt College, advised Cointelegraph, “Overseas authorities patrons are usually sticky, that means that they won’t simply transfer their holdings until there’s a severe want for them to take action.”
Moreover, based on the Monetary Occasions, a lot US debt in Europe shouldn’t be 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 patrons of US Treasurys.
Subsequently, even when European powers needed to dump US debt, they’d have to compel these personal patrons to promote. Yadav stated that it “doesn’t appear probably 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 in all probability 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 varieties of presidency debt which might be thought of most safe as collateral,” stated Yadav.
The principle drawback is that there aren’t a variety of alternate options to US debt as a risk-off funding. Treasurys nonetheless boast a “risk-free” standing and customarily are extremely liquid.
“At the same time as different extremely steady and secure nations, similar to Germany, start to challenge 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,” stated Yadav.
There’s additionally a paucity of potential patrons. China has been scaling again the tempo of its US debt purchases, Yadav famous.
Asian patrons 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 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 principle there’s the potential for the USD to drop ought to worldwide savers stage a mass retreat from US property, the sheer dimension of US capital markets means that such an exit is probably not possible given the restrictions of different markets.”
Stablecoins change into main patrons 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 property working within the nation will need to 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 presents an incredible benefit for US policymakers, but it surely additionally deepens the hyperlink between the continuity of stablecoin issuers and that of the flexibility of US Treasury markets to proceed remaining liquid and fashionable,” stated Yadav.
Associated: Senate passes GENIUS stablecoin invoice amid considerations over systemic danger
The proliferation of stablecoin issuers as a purchaser for US debt doesn’t come with out its dangers. This, mixed with fewer patrons of US debt, notably 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 stop the issuer from promoting off its securities. It could change into bancrupt and in addition considerably affect the credibility of US Treasury markets.
Financial and army escalation in an more and more multi-polar world has created rifts between former allies. Whereas there’s hope for a dialogue between the EU and US, Latvian President Edgars Rinkēvičs stated, “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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