“Europe owns Greenland, but it also owns a lot of US bonds,” George Saravelos, head of currency research at Deutsche Bank, wrote in a note to investors. “Despite its military and economic power, the US has a fundamental weakness: It relies on others to pay its bills through large trade deficits,” he noted, quoted by Bloomberg.
As Europe, the US's largest creditor, considers how best to respond to Donald Trump's latest threats to Greenland's sovereignty, the weaponization of US debt is stirring debate.
The “Sell America'' movement, fueled by the “Emancipation Day'' tariffs, is coming back to the fore, already in response to the Trump administration's attack on Fed Chairman Jerome Powell.
European countries hold trillions of dollars worth of US bonds and stocks, fueling speculation that selling them would be a satisfactory response to Trump's new tariff war, potentially sending borrowing costs higher and stocks lower.
Outside the control of governments
But, as Bloomberg notes, that's easier said than done. Most are owned by private funds, outside the control of governments.
American assets held in the European Union amount to more than $10 trillion, according to US Treasury data, with even larger assets located in the United Kingdom and Norway.
A blow to investors
Although some US assets are held by public sector entities – the largest of which is, for example, Norway's $2.1 trillion sovereign wealth fund – most of it is held by a multitude of private investors.
Therefore, such a move could hurt European investors.
Most strategists believe that, in the end, there is little chance that policymakers will go that far.
They must be willing to “pay”
The mere fact that Saravelos spoke openly about “weaponizing capital” shows that such retaliation is becoming a threat to the markets.
“The US foreign investment shortfall is huge and a potential threat to the dollar, but only if foreign holders of US assets are willing to pay,” said Kit Yuks, chief currency strategist at Société Générale SA.
Escalating tensions on Monday weighed on US stock futures, European yields and the dollar – with gold, the Swiss franc and the euro among the main beneficiaries.
This is the milder version of how investors reacted after Trump imposed tariffs last April – showing that the “Sell America” slogan could be back in force.
The most tangible reaction from the EU so far has been a proposal to halt the process of approving the July trade deal with the US. European leaders are also discussing the possible use of the “trade bazooka,” meaning tariffs on 93 billion euros ($108 billion) worth of American goods.
Why take the risk?
Any weaponization of American assets held by Europeans would constitute a serious escalation. In effect, it would turn a simmering trade war — which investors largely dismissed last year — into a financial conflict that directly affects capital markets.
“In an environment where the geopolitical stability of the Western alliance is deeply disturbed, it is not clear why the Europeans would be willing to play this role,” Saravelos finally pointed out.
Maybe they have already sold.
Additionally, investors who were concerned about overexposure to US assets due to Trump's latest policies may have already limited their holdings.
“It is reasonable to assume that there has been a rebalancing of dollar positions, which will protect it from another episode of market jitters,” said Jane Foley, head of currency strategy at Rabobank.
It's worth noting that US Treasuries ended up having their best year since 2020, and US stocks continue to break new records.
