Europe can just stop buying new bonds to hurt the US. No sell-off required.
Here are some policy levers that could be implemented, some immediately, some would take a few months. I would not suggest they are explicitly presented as a counter to Trumps Tariffs. Just do it quietly. The US banks, Japan and China will work it out quickly and will follow the lead.
1. Regulators reclassify US Treasuries from zero to non-zero risk weight (10%)
2. Norway’s sovereign fund announces geographic reallocation review
3. ECB/BOE apply haircuts to US Treasuries as collateral
4. EIOPA raises capital charges for insurers’ unhedged dollar exposures.
5. Finance ministers issue joint guidance questioning USD concentration as prudent.
6. State-owned development banks and export credit agencies directed to reduce USD holdings.
7. Pension fund regulators update guidance on currency matching to liabilities.
8. Tax treatment adjusted to favour euro-denominated over dollar-denominated investments.
9. Public institutions directed to move assets from US to European custodians and asset managers.
10. Euro-denominated bond issuance subsidised or guaranteed to reduce corporate dollar funding needs.
It’ll take a few weeks for the effects to materialise but they surely will.
I don’t find this argument very complelling. If there are really few buyers than even a mild sell off would make the value of US treasuries temporarily tank and in turn make it very difficult of the US to issue new ones, which they depend on to finance their huge deficit.
temporarily tank and in turn make it very difficult of the US to issue new ones, which they depend on to finance their huge deficit.
Which is irrelevant, just QE and the Fed buys new debt off Treasury, also, just issue it with a 0% coupon rate, so no interest… this is exactly what Japan has done with the Yen for decades. Then only issue after that is inflation.
The current US debt can’t be paid back, it’s too big, holding more debt in that context is irrelevant.
It’s dicey criticizing the FT because generally speaking they have some of the smartest people in money writing for them, but I think they may be somewhat overstating their position here.
They say:
That means that leveraging the aggregate sums is far from straightforward. In practice, it might even be impossible.
But I think that if you removed the USA from Annex 2 of the COMMISSION IMPLEMENTING DECISION (EU) 2021/1753 and from the list of nations in Credit Quality Step 1 as specified in Article 180 of Commission Delegated Regulation (EU) 2015/35, you would see private investors selling off US Treasuries rather than buying other reserves to counterbalance the new risk suddenly on their balance sheets.
They also say:
A thing that people often forget is that every seller requires a buyer, and it’s unclear who would be willing to take the other side of any European fire sale of US assets.
But if I’m an EU legislator, I’m going to be asking, if we’re worried no-one will buy US Treasuries now, when US-based lenders are eager to repatriate US Treasuries to leverage lending for AI data center construction, why do we think there is going to be more of a market if the US is in a shooting war with the rest of NATO? Better to get while the getting’s good, rather than wait for the loss of blood and treasure.
I think it’s better to focus on the tail end of their arguments, as opposed to whether it’s technically possible.
European banks and investors are stuffed with Treasuries. If they tumble in value because of a threat of a European boycott, then it would probably end up harming Europe just as much as the US, if not more so. Moreover, a large-scale repatriation of capital would send the dollar tumbling and the euro rocketing, which would alone possibly be enough to send many European countries into a recession.
For example, forcing your bank sector to sell off a bunch of assets that are considered “risk free”, comes with consequences.
Also consider that a majority of European leaders seem to be banking on the whole Trump era to blow over at some point soon. They hope to be able to rely on the US again and don’t really want to do any lasting harm (probably).
For example, forcing your bank sector to sell off a bunch of assets that are considered “risk free”, comes with consequences.
“Risk Free” tells me your mental models havent been absorbing recent changes. A US that is attacking former friends and allies and especially itself, who abandons any pretense of law and order, of the neutral functioning of predictable markets in a storm of serial extortionism, undermining their own labour pools, capital markets and central banking while going on a wild spending spree of unproductive thuggery and grift. (Pauses for breath.) You call that risk free?
Don’t be the dude left holding the bag. US dollars debt and equities are poison. Contracts aren’t legally enforceable and courts don’t practice law, just applied politics.
Get out while you can. This shithole is going to collapse quickly.
I agree that the later half of the article is the stronger portion; I was just surprised to see the lower quality front half under the FT masthead. I also suspect you’re right about what the EU will do, rather than my focus on what they can do.
But if the FT’s argument is that the EU doesn’t have the stomach for a strong euro and reduced exports, that’s something that can change quickly. If your assumption is you can wait out the mad king, doing nothing is clearly the cheapest option. But if your assumption changes to be that you cannot (which it seems more and more people are coming to that conclusion) then you want to be the first to sell. Legal hurdles would be a much stronger constraint than EU leaders’ preferences.
What i wonder is, if the value of us bonds tank who will lose money too and what will the world buy instead? Because hurting the US is one thing, but turning global financial system upside down could have some very undesirable side-effects.
As the global reserve currency, if the value of the USD drops, the value of every other currency goes up relatively speaking
Or very desirable side-effects - depending on whom you ask.
China. So they can tank the US economy at will and coerce Trump into doing what is in China’s best interest.
