TEXT-Fitch affirms Luxembourg at 'AAA'; outlook stable
(The following statement was released by the rating agency)
Sept 25 - Fitch Ratings has affirmed Luxembourg's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. The Outlooks on the IDRs are Stable. Fitch has simultaneously affirmed Luxembourg's Country Ceiling at 'AAA' and Short-term foreign currency IDR at 'F1+'.
Luxembourg's 'AAA' rating is underpinned by its developed, ultra-open economy, high income, strong public balance sheet and net external creditor position.
After a strong rebound from the 2008-09 financial crisis, the economy has slowed significantly since Q411. Notwithstanding the volatility of quarterly data, the Luxembourg economy has clearly underperformed its largest neighbour, Germany, over the past year and is expected to stagnate in 2012. Fitch forecasts only a gradual recovery of the economy from 2013 onwards.
Luxembourg has a track record of prudent fiscal policy. General government debt was 18% of GDP in 2011, the lowest among 'AAA' rated sovereigns, while social security reserves exceeded 27% of GDP. Nevertheless, in the long term, Luxembourg has to address sizeable contingent liabilities in the pension system. Delays in the finalisation of the proposed pension reform plans would have an unfavourable impact on longer-term fiscal sustainability.
The budget deficit fell to 0.6% of GDP in 2011, partly due to temporary measures. Nevertheless Fitch estimates that further structural measures will be needed on top of the existing 1.2% of GDP consolidation plans, effective from 2013, to reach the medium-term objective of 0.5% of GDP structural surplus, which would set the debt/GDP on a declining trend.
As a side effect of the ECB's liquidity injecting operations and the fragmentation of the eurozone financial system, the cross-border claims of national central banks within the Eurosystem (often referred to as 'Target2 balances') have increased substantially over the past two years. Luxembourg has the largest such exposure among member states relative to its economy, exceeding 250% of GDP. However, direct losses to Luxembourg would materialise only in the extreme scenario of full break-up of the monetary union. Fitch considers this to be a small probability, although a large impact risk.
As a financial centre of the eurozone and home to more than 140 banks, Luxembourg is exposed to cross-border risks stemming from parent banks. While domestic risks to financial stability are low, due to the strong balance sheet of domestic sectors, eurozone systemic risks will prevail until the proposals to deepen integration, in particular, a system-wide framework for cross-border resolution and burden sharing, are turned into actual rules.
Luxembourg has a strong external balance sheet. Its net international investment position was equal to 85% of GDP in 2011. The current account has been in surplus for more than 20 years and remained above 7% of GDP in 2011.
Luxembourg ranks highly on all World Bank governance indicators, in line or exceeding 'AAA' medians. Its institutional strengths foster confidence in its ability and willingness to honour its public debt commitments.