America’ 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 making ready doable responses to additional escalation.
One choice was chopping off entry to US markets by way of the so-called “commerce bazooka.” If triggered, it will minimize off US corporations from the EU market, costing them billions. Another choice is offloading the trillions of {dollars} in US belongings held in Europe.
However questions stay concerning its feasibility, as dumping may drastically change the worldwide financial panorama. It may 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 doable responses. Whereas Denmark deployed particular forces to Greenland, different heads of state steered the commerce bazooka, which might deny the US entry to EU markets.
Others, together with former Dutch Protection Minister Dick Berlijn, steered that Europe may use US debt as leverage. Berlijn stated, “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 word final weekend, “For all its army and financial power, the US has one key weak spot: it depends on others to pay its payments through massive exterior deficits.”
Saravelos stated that the US at present 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 may 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, “International authorities consumers are usually sticky, that means that they won’t simply transfer their holdings until there’s a critical want for them to take action.”
Moreover, in keeping with the Monetary Instances, a lot US debt in Europe just isn’t 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.
Subsequently, even when European powers wished to dump US debt, they’d have to compel these non-public consumers to promote. Yadav stated that it “doesn’t appear possible within the close to time period that European governments might impose restrictions on hedge funds shopping for US Treasurys.”
SocGen’s chief FX strategist, Package Juckes, wrote, “The scenario most likely 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 varieties of presidency debt which might be thought of most safe as collateral,” stated Yadav.
The principle downside is that there aren’t numerous alternate 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 steady and protected nations, similar to Germany, start to situation debt, their debt markets stay comparatively small, such that it is extremely troublesome to examine them ever taking the place of the US Treasury market,” stated 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 don’t have the capability to soak up that many US belongings. The market capitalization of the MSCI All-Nation Asian index, which tracks massive 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 massive present account deficit means that in concept there’s the potential for the USD to drop ought to worldwide savers stage a mass retreat from US belongings, the sheer measurement of US capital markets means that such an exit will not be possible given the constraints of different markets.”
Stablecoins change into main consumers of US debt
One rising main purchaser of US debt is stablecoin issuers.
In line with the GENIUS Act, the US’ landmark laws making a framework for stablecoins, issuers of these belongings 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 signifies that their want for Treasurys is correspondingly excessive. To the extent that this development continues, it presents an important benefit for US policymakers, however 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 common,” stated Yadav.
Associated: Senate passes GENIUS stablecoin invoice amid considerations 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, notably within the occasion of the EU dumping and even considerably reducing its publicity, may spell bother 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 may forestall the issuer from promoting off its securities. It might 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 nicely.
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