By Alvise Lennkh-Yunus and Eiko Sievert, Sovereign and Public Sector

While the tone of the US administration over Greenland’s future has moderated, the heightened unpredictability of US foreign policy and increasing tensions with its European partners are weakening the credit outlook for both sides.

For Europe, our baseline expectation remains for a broadly resilient credit outlook marked by continued rating convergence between higher-rated sovereigns and those most impacted by Europe’s previous sovereign crisis.

We remain cautiously optimistic about growth, inflation and fiscal positions for 2026, but with three important caveats.

First, our outlook assumes that the EU can still rely on the US as a credible and trusted security partner. Following divisions over burden-sharing and support for Ukraine, the Greenland crisis represents another sign of elevated tensions among NATO members.

Greenland issue net yet resolved; Russia’s war in Ukraine continues

While President Donald Trump has backed down from threats to use military action against a NATO member and imposing new tariffs on several EU member states supporting Denmark, the territorial issue over Greenland is not yet settled.

Secondly, we assume no further escalation of Russian aggression in Europe.

Both risks, which may be correlated, would significantly increase the threat to European security, leading to a sharper increase in defence expenditure, weakening credit profiles of highly indebted sovereigns. In addition, Russian aggression would also affect the credit profiles of potentially directly impacted countries.

Our third caveat relates to Europe’s domestic politics ahead of the elections scheduled in 2027 in France (AA-/Negative) and Poland (A/Stable), and uncertainty over the future of the governing coalition in Germany (AAA/Stable).

Political polarisation and fragmentation in the EU’s largest member states risks undermining a comprehensive and effective response to escalating geopolitical threats, particularly given growing US interference in domestic European politics.

Too early to assess the sovereign ratings impact on Europe

Should tensions escalate, credit implications and potential rating actions will be country-specific given the scale of the geopolitical and economic disruption stemming from a more confrontational US foreign and trade policy and Europe’s evolving policy responses and mitigating measures.

The impact would be uneven across Europe. For example, in the Nordics, Denmark, Norway and Sweden are well placed to absorb near-term economic shocks. All three sovereigns are rated AAA/Stable, with ample fiscal buffers to absorb short-term trade shocks.

In contrast, Finland (AA+/Negative) has faced a challenging fiscal and economic outlook for several years due to the accumulation of external shocks including supply chain disruptions, Russia’s war in Ukraine, rising interest rates, and higher US tariffs. These factors, combined with elevated structural pressures from an ageing population underpin the Negative Outlook. Further escalation of trade tensions between the EU and US would add to rating pressures.

As for countries in Central and Eastern Europe, Slovakia (A/Negative) is the only sovereign we currently rate with a Negative Outlook due to large fiscal deficits, external vulnerabilities, and a modest growth outlook. A potential deeper rupture between the US and other NATO members would likely lead to added fiscal pressure from an acceleration in defence spending across the region.

Questions over US policy reliability weigh on the outlook

The widening rift in transatlantic relations also has credit implications for the US.

The Trump administration’s escalation of political pressure against its NATO allies over the future of Greenland coincides with the weakening of domestic governance as reflected in our recent downgrade of the US sovereign rating to AA-/Stable.

Policy missteps both abroad but also at home are becoming more likely in an already politically charged context, not least given the escalating political pressure on the Federal Reserve. This is most evident in the growing pressure on the Fed to sharply cut interest rates despite persistent inflation above target, still resilient economic growth, and low unemployment.

At the same time, concerns over long-term fiscal sustainability remain, given elevated US budget deficits and rising government debt. The outcome of the November 2026 midterm elections will determine whether a renewed political stand-off over the debt ceiling emerges.

Investors likely to continue to recalibrate risk of holding dollar assets

Investors are increasingly recalibrating the risks of holding US dollar-denominated assets even if the dollar is unlikely to be replaced as the world’s reserve currency. The share of dollar-denominated foreign exchange reserves stood at 57% in the third quarter of 2025, still high but down from 70% in 2000 and the lowest percentage in more than 25 years.

Amid rising US policy uncertainty, investors will gradually further diversify their US holdings, putting downward pressure on the dollar, which may lead to upward pressure on risk premiums for future Treasury issuance, compounding fiscal vulnerabilities as interest expenses rise.

US net government interest payments as a share of general government revenue increased to 11.4% in 2024, well above the EU average of 3.4% and are set to increase further in coming years.

We expect the US general government debt ratio to hit 140% of GDP by 2030, up from 122% in 2024. Among advanced economies, this would place the US as the second most highly indebted sovereign after Japan (A/Stable), and above forecasted debt levels by 2030 in the UK (AA/Stable) at 115%, France (AA-/Negative) at 125% and Italy (BBB+/Positive) at 136%.