Deutsche Bank says US national debt is ‘achilles heel’ in Trump’s Greenland threats

President Trump believes the United States needs to buy the region (it is not for sale) for national security reasons, claiming that China and Russia also want to control the region. He argues that Denmark, which considers Greenland part of the autonomous kingdom, does not have the capacity to defend the territory.

Trump’s request to buy lands under the jurisdiction of another country was not received well by the Western world. While the United States may be the largest economy on the planet, patience is wearing thin among its allies, after a year of thorny debate over tariffs and military spending.

Economists are now warning that the elasticity of power this weekend may be over-exaggerated, and Trump’s weakness may turn out to be America’s voracious spending habits.

Deutsche Bank’s Jim Reid highlighted that April liberalization day tariffs were eased a week later, after US Treasury yields had a “scary” session as investors retreated to safety, away from US borrowing.

“Financial markets may play a large role in how this situation resolves itself,” Reed wrote in a note to clients this morning. “The main Achilles heel for the US is its huge twin deficits. So, while in many respects it looks like the US holds the economic cards, it does not hold all the financing cards in a world that will be very upset by the events of the weekend.”

Investors, analysts and world leaders have long wondered when or if a debt crisis will occur in a country saddled with massive deficits. Although countries such as Japan, the United Kingdom, and France are by no means working to balance their books, the US deficit, which amounts to $38 trillion, is much greater than that of its counterparts. While much of this debt is held by the general public (including the Federal Reserve, where President Trump also faces a difficult situation), huge amounts are also owned by foreign governments and foreign investors.

This exposure, worth up to $8 trillion, could be something European leaders decide to remind the White House about, ING noted. That Europe is America’s largest lender “demonstrates the deep interdependence between the United States and Europe, but it also shows, at least in theory, that Europe also has leverage over the United States,” wrote Carsten Brzeski, global head of macroeconomics, and Bert Kolen, chief economist in the Netherlands. The duo added: “Whether Europe will actually engage in a ‘sell-off’ season is a different question entirely. There is little the EU can do to force European private investors to sell US dollar assets; it can only try to stimulate investments in euro assets.”

Alternative measures: ACI

The European Union also has a weapon in its arsenal that it has not yet deployed. French President Emmanuel Macron has suggested that it is time to use the EU’s anti-coercion (ACI) instrument. This tool is a set of countermeasures against any foreign powers that unjustifiably interfere in the political choices of the European Union or its member states, by restricting American companies from accessing the European market, preventing them from bidding for government work, restricting trade, and limiting foreign investment.

The European Union could also impose new tariffs on about $100 billion of its imports from the United States

Goldman Sachs believes this is likely to be one of the responses European leaders are now considering. Analysts Sven-Jari Steen and Giovanni Pierdomenico wrote this weekend that the legislation was designed specifically for situations like this — though perhaps not with an ally as powerful as the United States in mind.

“The triggering does not imply implementation (which requires several steps) but signals potential EU action and allows time for negotiation,” the duo wrote. “ACI could include a broader range of policy tools than tariffs, such as investment restrictions, and taxation of US assets and services.” Regarding services, the EU maintains a surplus compared to the United States, which means it would do more harm to this particular industry than similar measures across the Atlantic.