In risk departments across Europe’s banks and pension funds, intense discussions are unfolding. The topic? Trump’s increasingly erratic behavior and what it means for financial stability.
At first glance, the immediate concerns seem obvious—tariffs, trade wars, and economic uncertainty. But that’s not where the real danger lies. European credit departments will, of course, start by assessing first-order effects: What happens if European exports to the U.S. get hit with fresh duties? What will be the impact on corporate borrowers?
These are valid questions, but they are not the question. Even if a U.S. recession spills over into Europe, most European banks would be well-positioned to absorb the shock.
The real risk isn’t about trade or growth. It’s about governance.
The Real Risk: Trump vs. U.S. Institutions
Financial markets don’t just price assets based on economic fundamentals. They price trust—trust in rules, institutions, and the predictability of policymaking.
That’s why Swiss or German bonds yield close to zero, while Turkish bonds trade at emerging-market risk premiums. It’s not just about whether a country can pay its debts—it’s about whether its institutions are strong enough to guarantee that it will.
Now, what happens if markets stop trusting the U.S.?
That’s where things get dangerous. If investors start questioning whether the U.S. will honor its debt commitments—or whether Trump might try to overtake the Federal Reserve—then the pricing of risk-free assets ceases to function. That’s when we could see a superspike in U.S. interest rates.
Trump vs. Powell: The Pressure Cooker
Trump has never been a fan of an independent Fed. In his first term, he relentlessly pressured Jerome Powell to cut interest rates, even calling him an “enemy.” Now that he’s back in the White House, he is explicitly demanding that the Fed loosen monetary policy.
If Powell resists, Trump could attempt to sideline him, install a more loyal figure, and directly interfere in Fed policy. If markets begin to question the independence of the Federal Reserve, confidence in U.S. Treasuries could unravel fast.
We have seen this before. Erdogan systematically undermined Turkey’s central bank, keeping interest rates artificially low, triggering an investor exodus, and ultimately causing bond yields to explode from 10% to nearly 50%.
If something similar happened in the U.S., rates could surge well above 20%. That has never happened before in the U.S., but it’s worth remembering that interest rates jumped from 9% to 15% in the late 1970s. The precedent is there.
The Liz Truss Warning
If that sounds far-fetched, just look at Liz Truss.
In 2022, she announced an unfunded tax-cutting plan, convinced that markets would cheer her “pro-growth” policies. Instead, markets panicked. The pound crashed, UK gilt yields surged, and the Bank of England was forced to step in to prevent a total meltdown. Truss lasted 44 days in office.
Now imagine that scenario playing out in the $25–30 trillion U.S. Treasury market. If investors decide Trump is a systemic risk, there won’t be a central bank in the world big enough to stop the fallout.
The Cracks Are Already Showing
Even before a Trump vs. Fed showdown, the U.S. credit system is under severe strain.
Commercial real estate loans are already underwater, with billions of dollars in debt coming due in 2025. The U.S. banking system is quietly accumulating losses, delaying the recognition of bad loans. Official data still paints a picture of relative stability, but beneath the surface, stress is building.
Counterparty risks for European banks and pension funds must not be underestimated. If the U.S. financial system experiences a liquidity crunch, those dependencies will be tested overnight.
Trump’s Erratic Behavior Is Accelerating
Trump’s return to the White House has been anything but predictable. His sudden tariffs on Canada, Mexico, and China—justified by vague claims about immigration and national security—are already straining trade relations. His decision to impose a 25% tariff on imports from Canada and Mexico and a 10% tariff on Chinese goods confirms what many already feared: economic policy under Trump 2.0 will be chaotic.
But it’s not just trade policy.
Trump has suggested that the U.S. should take over the Gaza Strip, arguing that it could be redeveloped into a resort destination—the “Riviera of the Middle East.” This kind of geopolitical adventurism has no basis in reality, but it spooks investors by signaling that the rules-based global order is no longer a constraint on U.S. decision-making.
Then there’s Greenland. Trump is once again pushing to acquire Greenland, describing it as a “strategic necessity.” Denmark has, once again, rejected the idea. But the fact that we are even talking about this again tells you everything you need to know about Trump’s priorities.
For markets, the signal is clear: the old rules do not apply anymore.
What European CROs Need to Consider
For European risk managers, the key question isn’t whether U.S. interest rates will rise—it’s whether the global financial system can continue to treat U.S. Treasuries as the ultimate safe asset. If that assumption breaks, we will see a violent repricing of risk.
A European bank cannot avoid U.S. exposure, but it can prepare for a scenario where the dollar collapses and interest rates spike. That means modeling:
- What happens if U.S. interest rates hit 10%?
- What happens if the dollar loses 50% of its value?
- What happens if U.S. banks experience a sudden funding crisis?
These are not baseline forecasts. But they are entirely possible scenarios that every CRO in Europe should be running now.
The Erdogan Scenario Is Not Free
Governance matters. Institutional credibility matters.
If those fundamentals are eroded, markets will demand a risk premium—and that means higher rates. The cost of debt will rise. Asset values will fall. The institutions that have underpinned global finance for decades will be questioned.
That is not free.
This is not an exercise in worst-case thinking. It is risk management. If U.S. institutions hold, we move on. If they don’t, those who failed to prepare will be the first to pay the price.
Be careful out there.