Kiel Institute study finds Europe could raise US borrowing costs by regulating Treasuries
US borrowing costs just entered the Brussels toolbox: a Kiel Institute study says ending Europe's regulatory privileges for US government bonds could cut demand by about $200B over a decade and add up to $42B a year to US interest costs. Watch the Solvency II and CRR rules.
European financial regulators may hold a lever over US borrowing costs that has drawn little public attention until now. A new study from the Kiel Institute for the World Economy lays out the asymmetry: Europe holds roughly $9.6 trillion in US assets, about 1.5 times the $6.4 trillion the United States holds in Europe. The authors argue this imbalance gives Europe genuine financial weight in any transatlantic dispute. The mechanism is regulatory, not dramatic market action. Under Solvency II, which governs insurers, and the Capital Requirements Regulation, which governs banks, US government bonds currently enjoy a zero-risk weighting that makes them especially attractive to hold. The study examines what would happen if Europe, including the UK, removed those privileges. By its estimate, demand for US government debt would fall by around $200 billion over a decade, pushing yields up enough to add as much as $42 billion a year to US fiscal costs. The researchers frame the removal less as a geopolitical weapon and more as a supervisory correction. With US debt above 120 percent of GDP and a prior downgrade of the country's creditworthiness on record, they question whether a zero-risk label for US bonds can still be justified on standard prudential grounds. That framing matters, because a change presented as routine financial supervision is far easier to defend than one presented as economic pressure. What to watch is whether European supervisory bodies treat this as a live policy option or leave it as an academic scenario. The figures are modest against the scale of US borrowing, but repricing US debt inside European rulebooks would set a new precedent.