The United States’ geopolitical brinkmanship over Greenland has highlighted its economic relationship with the EU. European countries are considering what tools they have to counter U.S. belligerence, including the “nuclear option” of forgiving U.S. debt.
After the purported “Framework of Agreement” at Davos, the tone has changed and US ambitions to occupy Greenland have so far subsided. However, EU leaders are still preparing possible responses to further escalation.
One option was to cut off access to the U.S. market through a so-called “trade bazooka.” If triggered, U.S. companies would be cut off from the EU market, resulting in billions of dollars in losses. Another option is to release trillions of dollars of U.S. assets held in Europe.
However, since dumping could significantly change the global economic situation, doubts remain about its feasibility. It could also have a knock-on effect on the U.S. financial system’s exposure to stablecoins.
Can the EU actually waive US debt?
By January 21, European leaders were considering possible responses. While Denmark sends special forces to Greenland, other heads of state have proposed trade bazookas denying the US access to EU markets.
Others, including former Dutch Defense Minister Dick Berlin, have suggested that Europe could use U.S. debt as leverage. “If Europe decides to offload these debts, it will create a big problem in the United States. (The dollar) will collapse and inflation will be high. American voters will not like that,” Berlin said.
“Despite the United States’ military and economic might, it has one significant weakness: its dependence on other countries to pay its bills through large external deficits,” George Saravelos, chief currency strategist at Deutsche Bank, said in a note over the weekend.
Saravelos said the United States currently holds $8 trillion in U.S. debt and stocks, “twice as much as the rest of the world combined.”
But can Europe actually repay this debt? There are questions both about how the EU can force a sale and who the potential buyers are in an increasingly de-dollarized world.
“Foreign government buyers tend to be sticky, which means they won’t easily move their holdings unless absolutely necessary,” Iesha Yadav, law professor and associate dean at Vanderbilt University, told Cointelegraph.
Additionally, much of Europe’s U.S. debt is not held by governments themselves, but by private entities such as pension funds, banks and other institutional investors, according to the Financial Times. Yadav noted that British, Luxembourg and Belgian hedge funds have emerged as major buyers of US debt.
So even if European countries wanted to get rid of their U.S. debt, they would have to force these private buyers to do so. “It seems unlikely in the short term that European governments will impose limits on hedge funds’ purchases of U.S. debt,” Yadav said.
“The situation will likely need to escalate significantly further before they undermine investment performance for political purposes,” wrote Kit Jacks, chief currency strategist at SocGen.
But “they may potentially consider opening up the types of government bonds that are considered safest as collateral,” Yadav said.
The main problem is that there aren’t many alternatives to U.S. Treasuries as a risk-off investment. Government bonds remain “risk-free” and generally highly liquid.
“Even though other very stable and safe countries like Germany have started issuing bonds, their bond markets are still relatively small, so it’s very hard to imagine them replacing the U.S. bond market,” Yadav said.
Potential buyers are also in short supply. Yadav noted that China is reducing the pace of its purchases of U.S. bonds.
Asian buyers do not have the capacity to absorb as many US assets. The MSCI All-Country Asia Index, which tracks large- and mid-cap stocks from developing and emerging markets in Asia, has a market capitalization of approximately $13.5 trillion. The FTSE World Government Bond Index is worth about $7.3 trillion, according to the Financial Times.
Rabobank analysts wrote: “Although the large U.S. current account deficit suggests that the U.S. dollar could theoretically depreciate if foreign savers make a large withdrawal from U.S. assets, the large size of the U.S. capital market suggests that such a withdrawal may not be feasible given the limitations of alternative markets.”
Stablecoins become major buyers of US Treasuries
One of the new major buyers of U.S. Treasuries is stablecoin issuers.
According to the GENIUS Act, a landmark U.S. law creating a stablecoin framework, domestically active issuers of these assets must back their coins with dollars and U.S. Treasuries.
“The fact that[stablecoin issuers]are growing this quickly means that the need for U.S. Treasuries is growing accordingly. As long as this trend continues, it will be a huge advantage for U.S. policymakers, but it will also deepen the link between the continuity of stablecoin issuers and the ability of the U.S. Treasury market to remain liquid and popular,” Yadav said.
Related: Senate passes GENIUS stablecoin bill amid systemic risk concerns
The proliferation of stablecoin issuers as buyers of U.S. Treasuries comes with risks. This, combined with fewer buyers of US debt, could create problems for the US debt market, especially if there is dumping or a significant reduction in exposure by the EU.
Yadav Malone and Brendan Malone, who previously worked in clearing and clearing at the Federal Reserve, had previously noted liquidity shocks in the U.S. bond market in both March 2020 and April 2025.
If a stablecoin issuer were to go on a run, this lack of liquidity and the growing scarcity of counterparties to sell to could mean that the issuer would be unable to sell its securities. If that happens, the country will become insolvent, which will have a major impact on the credibility of the U.S. bond market.
Economic and military escalation in an increasingly multipolar world is creating rifts between former allies. While there are hopes for dialogue between the EU and the US, Latvian President Edgars Rinkevich said: “We are not out of the woods yet (..) Are we in an irreversible rift? No. But there is clearly a present danger.” This danger is manifested not only in the sovereignty of Europe and Greenland, but also in the US bond market.
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