The United States’ geopolitical instability over Greenland has thrown its economic relations with the European Union into sharp relief. European powers are considering what tools they have to counter US belligerence, including the “nuclear option” of unloading US debt.
The tone has changed after the so-called “outline deal” in Davos, and US ambitions to annex Greenland have cooled for the time being. But EU heads of state are still preparing possible responses to further escalation of tensions.
One option was to cut off access to US markets through the so-called “trade bazooka”. If triggered, it would cut off US companies from the EU market, costing them billions in losses. The second option is to sell trillions of dollars of US assets in Europe.
But questions remain about its feasibility, as dumping could drastically alter the global economic landscape. This may also have an impact on the exposure of stablecoins to the US financial system.
Can the EU really forgive US debt?
Before January 21, European leaders were considering possible responses. While Denmark deployed special forces to Greenland, other heads of state suggested a trade bazooka, which would deny the US access to EU markets.
Others, including former Dutch Defense Minister Dick Berlijn, suggested that Europe could use the US loan as leverage. “If Europe decides to sell those bonds, it creates a big problem in the US,” Burlizn said. [The dollar] Accidents, high inflation. American voters will not like this.”
“For all its military and economic strength, the US has one major weakness: it is dependent on others to pay its bills through large external deficits,” George Saravelos, chief FX strategist at Deutsche Bank, wrote in a note last weekend.
Saravelos said the US currently owns $8 trillion in US bonds and equities, “twice as much as the rest of the world combined.”
But can Europe really pay off this debt? These are questions both about how the EU might force a sale and, in a world that is rapidly de-dollarizing, who the potential buyers are.
“Foreign government buyers are sticky, meaning they will not easily increase their stake unless there is a critical need to do so,” Yasha Yadav, a law professor and associate dean at Vanderbilt University, told Cointelegraph.
Furthermore, according to the Financial Times, most US debt in Europe is not held by governments themselves, but by private entities such as pension funds, banks and other institutional investors. Yadav said hedge funds in the UK, Luxembourg and Belgium have emerged as major buyers of US Treasuries.
So, even if European powers wanted to dump US debt, they would have to force these private buyers to sell. Yadav said that “in the near term it seems unlikely that European governments will impose restrictions on hedge funds buying US Treasuries.”
“The situation probably needs to be pushed a little further before they damage their investment performance for political purposes,” wrote Kit Jucks, chief FX strategist at SocGen.
However, “they could potentially think about opening up the types of government debt that are considered safest as collateral,” Yadav said.
The main problem is that there are not many alternatives to US debt as a risk-free investment. Treasuries still claim “risk-free” status and are generally highly liquid.
“Even as other highly stable and safe countries like Germany have begun issuing debt, their debt markets remain relatively small, so it is very difficult to imagine them replacing the US Treasury market,” Yadav said.
There is also a shortage of potential buyers. Yadav said that China is reducing the pace of its US debt purchases.
Asian buyers do not have the capacity to snap up so many US assets. The market capitalization of the MSCI All-Country Asian Index, which tracks large- and mid-cap stocks in developing and emerging markets in Asia, is about $13.5 trillion. According to the Financial Times, the FTSE World Government Bond Index is worth about $7.3 trillion.
“While the US’s large current account deficit suggests that the USD is theoretically likely to decline if international savers retreat en masse from US assets, the sheer size of US capital markets suggests that such an exit may not be possible given the limitations of alternative markets,” Rabobank analysts wrote.
Stablecoins have become major buyers of US debt
An emerging major buyer of US debt is stablecoin issuers.
According to the Genius Act, the landmark US law creating a framework for stablecoins, issuers of those assets operating in the country must hold dollars and reserves with the US Treasury to back their coins.
“He [stablecoin issuers] The faster they are growing, it means the greater is the need for them for the treasury. To the extent this trend continues, it provides a huge benefit for US policymakers, but it also deepens the connection between the persistence of stablecoin issuers and the ability of US Treasury markets to remain liquid and popular,” Yadav said.
Connected: Senate passes Genius stablecoin bill amid concerns over systemic risk
The proliferation of stablecoin issuers as buyers of US debt does not come without its risks. This, combined with fewer buyers of US debt, could spell trouble for US Treasury markets, especially in the event of EU dumping or even a significant reduction in exposure.
Yadav and Brendan Malone, who previously worked in payments and clearing at the Federal Reserve Board, have previously observed liquidity shocks in US debt markets in both March 2020 and April 2025.
In the event of a run on stablecoin issuers, a lack of liquidity and an increased shortage of counterparties to sell may prevent issuers from selling their securities. It would go bankrupt and the credibility of the US treasury markets would be significantly affected.
Economic and military growth in an increasingly multipolar world has driven rifts between former allies. While talks are expected between the EU and the US, Latvian President Edgars Rinkevics said, “We are not out of the crisis yet.” [..] Are we in an irreversible rift? “No, but there is a clear and present danger.” The threat appears not only to the sovereignty of Europe and Greenland, but also to US debt markets.
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