Could Europe Consider Selling Off US Debt Over Greenland?
European leaders are contemplating the possibility of selling US debt as a response to US foreign policy actions regarding Greenland.
Could Europe Consider Selling Off US Debt Over Greenland?
Some European officials have hinted at selling US debt as a response to US assertiveness, particularly over Greenland, though implementing such a strategy may prove complicated.
The ongoing geopolitical tension surrounding Greenland has highlighted Europe’s economic links to the US. Policymakers in Europe are mulling various options, one of which includes the drastic measure of offloading US debt, termed the “nuclear option.”
Recently, discussions were initiated after a supposed framework for a deal at Davos, and US strategies regarding Greenland have temporarily calmed down. However, EU leaders are still preparing for potential future actions.
One proposed tactic was to limit access to US markets—a move that could result in significant losses for American companies. Another was to consider the possibility of selling off the vast amounts of US debt held by EU nations.
Yet, the practicality of such a move raises critical questions. Offloading US assets could shake the global economic framework and affect US financial stability, especially its encounters with stablecoins.
Can the EU Actually Dump US Debt?
Before January 21, European leaders reviewed their responses. While Denmark dispatched special forces to Greenland, some proposed limiting US access to the EU market.
Dick Berlijn, a former Dutch Minister of Defence, remarked that offloading bonds would spell trouble for the US, predicting a decline of the dollar and an increase in inflation—unpleasant outcomes for American voters. Likewise, George Saravelos noted that the US must rely on foreign nations to finance its large deficits.
However, whether Europe can execute such a sale remains in question. Yesha Yadav of Vanderbilt University indicated that foreign government buyers tend to retain their assets unless absolutely necessary.
Moreover, most of the US debt held by Europe belongs to private entities such as pension funds and banks. Therefore, even if European nations desired to sell US debt, they would need to persuade these private investors to do so, an unlikely scenario in the short term.
Kit Juckes from SocGen explained that conditions would need to worsen significantly before these entities would risk financial loss for political motivations.
Despite the limited alternatives to US debt for-risk avoidance investors and the fact that other highly stable markets remain relatively small, potential buyers for US assets appear scant. Furthermore, Yadav noted that Asian investors are unable to absorb large quantities of US assets due to market size constraints.
Stablecoins Become Major Buyers of US Debt
Stablecoin issuers are increasingly significant buyers of US debt. The GENIUS Act mandates that US stablecoin issuers maintain dollar and Treasury reserves. According to Yadav, this growth places a high demand on Treasurys and, if the trend continues, establishes a critical link between the health of stablecoins and US Treasury markets.
The dependency of US Treasury markets on these new buyers poses risks, especially with fewer investors on the market. Another liquidity challenge is the potential instability caused by a rapid decline in stablecoin value, possibly affecting the overall credibility of US debt markets.
Recent economic and military tensions in a shifting global landscape have strained relationships between previous allies. Although dialogue between the US and EU remains hopeful, Latvian President Edgars Rinkēvičs warned that the relationship is fraught with risks that could adversely affect both Europe and US debt.
