Sale of American Debt: How Real is the Threat to Europe?

European Union leaders are reportedly considering an extreme measure, the sale of American government bonds, if US President Donald Trump ‘turns his back’ on Ukraine and jeopardizes the continent’s security.

Although nothing has been officially confirmed or denied, during negotiations with Russia and Ukraine regarding peace, sources from the Wall Street Journal warned that the White House might sacrifice its NATO allies for its own economic interests.

On Sunday, talks between American and Ukrainian representatives continued in Miami, with the participation of Secretary of State Marco Rubio, Trump’s envoy to Russia Steve Witkoff, and Jared Kushner. After ‘fragile’ negotiations, Trump stated that there is a ‘good chance for an agreement’.

However, despite extensive negotiations, there are no significant steps forward, although the Kremlin announced that the Russian president accepted ‘some American proposals to end the war in Ukraine, while rejecting others’, adding that Russia is ready to meet with American negotiators as long as necessary to reach an agreement.

According to Hina’s reporting, Kremlin spokesman Dmitry Peskov said that ‘for the first time there has been an exchange of views, which is normal in the process of finding a compromise.’ Peskov stated that Russia is grateful to Trump, but that the Kremlin will not publicly comment on negotiations with the US as it would not be constructive.

Trump’s 28-point plan, which was made public in November, alarmed Ukraine and Europe, who believe it leans too much towards Russia.

Nevertheless, EU leaders remain cautious, considering all options. According to the WSJ, European intelligence agencies shared confidential information among their leaders about private negotiations of Trump’s administration with Moscow to assess potential risks to Europe’s security.

EU member states and the United Kingdom hold a total of about $2.34 trillion in American debt, giving them significant influence. A rapid sale of bonds could trigger a decline in the value of the dollar, a crisis in the banking system, and a spike in borrowing costs, with consequences worse than the 2008 financial crisis.

But how real is the threat that the EU and UK would actually embark on a mass sale of American government bonds? The answer to this question was provided by partner at Mathematica Capital Partners Marin Onorato.

– The threat of selling American government bonds did not come through official channels but was reported by the media from a source who was present at meetings of European state officials. I believe the threat is not real, but rather an indicator of how far Europe and the US are drifting apart, explains Onorato, noting that central banks respond to the authorities of individual states, so if state leaders decide to do so, central banks would have no choice.

Onorato confirmed that the EU and UK currently hold about 10 percent of the total American debt, but adds that this includes all participants registered in that space, meaning it encompasses state treasuries, central banks, commercial banks, funds, and all other participants in the financial market.

– If we only consider those institutions that are state-owned (state treasuries and central banks), then the upper limit is $300 billion, which is less than one percent of the total debt, says Onorato.

However, if we really look at ‘what if’, meaning what if the EU actually started selling American debt, interest rates on bonds would certainly rise.

– But here we must also consider the fact that the daily trading volume of American bonds is one trillion dollars. If the sale destabilizes the market, which would likely be the goal of such an action, the Fed would step in and quickly stabilize the market by purchasing bonds. If you look at the spring of 2020, the Fed bought several trillion dollars to provide liquidity to the market so it could function. This would of course have negative consequences for the American dollar and stock markets, notes Onorato.

In the end, as the US is a capital importer, Onorato concludes, this would result in higher interest rates in the US and a weaker dollar, which would only accelerate the path we are on, which is deglobalization and polarization.