The United States’ geopolitical brinkmanship over Greenland has thrown its economic ties to the EU into sharp relief. European powers are considering what instruments it has to combat US belligerence, including the “nuclear option” 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. But EU heads of state are still preparing possible responses to further escalation.
One option was cutting 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. Another option is offloading the trillions of dollars in US assets held in Europe.
But questions remain regarding its feasibility, as dumping could drastically change the global economic landscape. It could also have knock-on effects for the US financial system’s exposure to stablecoins.
Can the EU actually dump US debt?
Prior to Jan. 21, European leaders were considering possible responses. While Denmark deployed special forces to Greenland, other heads of state suggested the trade bazooka, which would deny the US access to EU markets.
Others, including former Dutch Defense Minister Dick Berlijn, suggested that Europe could use US debt as leverage. Berlijn said, “If Europe decides to offload those bonds, it creates a big problem in the US. [The dollar] crashes, high inflation. The US voter won’t like that.”
George Saravelos, Deutsche Bank’s chief FX strategist, wrote in a note last weekend, “For all its military and economic strength, the US has one key weakness: it relies on others to pay its bills via large external deficits.”
Saravelos said that the US currently owns $8 trillion in US bonds and equities, which is “twice as much as the rest of the world combined.”
But can Europe actually offload this debt? There are both questions of how the EU could compel a sale and, in a world that is increasingly de-dollarizing, who potential buyers are.
Yesha Yadav, a professor of law and associate dean at Vanderbilt University, told Cointelegraph, “Foreign government buyers tend to be sticky, meaning that they will not easily move their holdings unless there is a serious need for them to do so.”
Furthermore, according to the Financial Times, much US debt in Europe is not held by governments themselves, but by private entities like pension funds, banks and other institutional investors. Yadav noted that hedge funds in the UK, Luxembourg and Belgium have emerged as major buyers of US Treasurys.
Therefore, even if European powers wanted to dump US debt, they’d need to compel these private buyers to sell. Yadav said that it “does not seem likely in the near term that European governments may impose restrictions on hedge funds buying US Treasurys.”
SocGen’s chief FX strategist, Kit Juckes, wrote, “The situation probably needs to escalate a fair bit further before they damage their investment performance for political purposes.”
However, “they may potentially think about opening up the kinds of government debt that are considered most secure as collateral,” said Yadav.
The main problem is that there aren’t a lot of alternatives to US debt as a risk-off investment. Treasurys still boast a “risk-free” status and generally are highly liquid.
“Even as other highly stable and safe countries, such as Germany, begin to issue debt, their debt markets remain relatively small, such that it is very difficult to envision them ever taking the place of the US Treasury market,” said Yadav.
There’s also a paucity of potential buyers. China has been scaling back the tempo of its US debt purchases, Yadav noted.
Asian buyers do not have the capacity to absorb that many US assets. The market capitalization of the MSCI All-Country Asian index, which tracks large and mid-cap stocks across developing and emerging markets in Asia, is roughly $13.5 trillion. Per the Financial Times, the FTSE World Government Bond Index is about $7.3 trillion.
Rabobank’s analysts wrote, “While the US’s large current account deficit suggests that in theory there is the potential for the USD to drop should international savers stage a mass retreat from US assets, the sheer size of US capital markets suggests that such an exit may not be feasible given the limitations of alternative markets.”
Stablecoins become major buyers of US debt
One emerging major buyer of US debt is stablecoin issuers.
According to the GENIUS Act, the US’ landmark legislation creating a framework for stablecoins, issuers of those assets operating in the country must have dollars and US Treasurys in reserve to back their coins.
“That [stablecoin issuers] are growing as fast as they are means that their need for Treasurys is correspondingly high. To the extent that this trend continues, it offers a great advantage for US policymakers, but it also deepens the link between the continuity of stablecoin issuers and that of the ability of US Treasury markets to continue remaining liquid and popular,” said Yadav.
Related: Senate passes GENIUS stablecoin bill amid concerns over systemic risk
The proliferation of stablecoin issuers as a buyer for US debt doesn’t come without its risks. This, combined with fewer buyers of US debt, particularly in the event of the EU dumping or even significantly decreasing its exposure, could spell trouble for US Treasury markets.
Yadav and Brendan Malone, who formerly worked in payments and clearing at the Federal Reserve Board, have previously noted liquidity shocks in US debt markets, both in March 2020 and April 2025.
In the event of a run on stablecoin issuers, this lack of liquidity and growing lack of counterparties to sell to could prevent the issuer from selling off its securities. It would become insolvent and also significantly impact the credibility of US Treasury markets.
Economic and military escalation in an increasingly multi-polar world has created rifts between former allies. While there is hope for a dialogue between the EU and US, Latvian President Edgars Rinkēvičs said, “We are not yet out of the woods [..] Are we in an irreversible rift? No. But there is a clear and present danger.” The danger appears not only to Europe and Greenland’s sovereignty, but to US debt markets as well.
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