Debates are heating up in investment circles about a possible 'radical' response from the European Union to Donald Trump's threats regarding the sovereignty of Greenland. This concerns a potential fire sale of American assets, the value of which exceeds $10 trillion in the EU, writes Bloomberg.
European countries hold enormous amounts of U.S. government bonds and stocks. A mass sell-off of these securities could drive up borrowing costs for Washington and crash the stock market, given the U.S. dependence on foreign capital.
«Despite its military and economic might, the U.S. has one key weakness: it relies on others to pay its bills through a huge external deficit,» notes George Saravelos, head of currency research at Deutsche Bank. He states that in the context of the destruction of the Western alliance, 'it is unclear why Europeans should continue to play this role.'
The analyst openly calls this scenario 'weaponization of capital,' which turns it into a serious risk for the markets.
Despite the loud statements, most strategists doubt the realization of such a scenario. The fact is that the bulk of assets belongs to private investors, not governments. Forcing them to sell securities at a loss for political purposes is extremely difficult. Moreover, a collapse of the American markets will also hit the European asset holders themselves.
Kit Jacks from Societe Generale believes that the situation needs to escalate much more for state funds to start dumping American securities at the expense of their own returns.
So far, investors are reacting moderately: the dollar and U.S. stock futures are declining, while gold, the Swiss franc, and the euro are rising. This resembles the reaction to tariffs last April, signaling a return to the trend of 'Sell America.'
At the moment, the EU's real response is more traditional: Brussels has frozen the ratification of the trade deal with the U.S. and is preparing tariffs on American goods worth 93 billion. However, the mere fact of discussing financial warfare indicates an unprecedented level of tension between allies.