As the tumultuous World Economic Forum in Davos draws to a close, investors are leading the way in severing ties with the United States government bonds, signalling a growing desire for financial separation from the Trump administration. This shift in the tectonic plates of international finance suggests that a divorce from the White House’s disruptive influence is on the minds of many.
The S&P 500 may appear to tell a different story, as it continues to suck in international money, leading to seemingly unstoppable gains. However, in other financial markets, the opposite is true. China has spent the past year reducing its holdings of US government bonds, effectively cutting the amount it lends to the US government through the bond market. Japanese pension funds have followed suit, driven by the fear of a stock market crash as US share prices reach levels not seen since the dotcom bubble.
This ongoing leaching away of bond investors means the cost of US government borrowing has begun to rise, little by little. If Europe were to institute a financial divorce, it too would start selling the US bonds it holds. The bold move by the AkademikerPension, the main retirement fund for Danish academics, to sell all of its remaining US government bonds by the end of the month, provides a glimpse of what could become the norm.
European regulators could facilitate this process by making it easier for other pension funds to sell their US bond holdings. Experts believe pension funds have slavishly followed credit rating agencies’ verdicts, which have often been proven flawed, as seen in the 2008 financial crisis. If pension funds can consider US debt to be more at risk, they can reduce their holdings, even at the cost of a lower bond value.
Furthermore, Europe could lend to itself by creating a market for bonds denominated in euros. This would offer an alternative safe haven, draining the US market even further. The opportunity is ripe, as funds around the world are seeking safe havens, and Europe could be one of those destinations.
Brussels could start with a coalition of the willing, rather than all 28 countries, and acknowledge that much of the money would be generated by banks in London, which host bond markets that run deeper and wider than anything on the continent. This could even pull the UK closer to the EU, as politicians in Berlin, Amsterdam, Dublin, and perhaps even Paris, would welcome the opportunity.
Ultimately, the creation of a degree of financial insulation from Trump’s threats of financial punishment, through the establishment of a European debt market in its own currency, could be the key to Europe’s path to financial independence.
