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Luxembourg report Luxembourg report
by Euro Reporter
2011-10-06 07:41:42
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Luxembourg’s Frieden says ‘all options on the table’ for Dexia

Luxembourg Finance Minister Luc Frieden said “all options” are on the table regarding Dexia SA (DEXB) and that France, Belgium and Luxembourg will do all that is needed for the bank. “I can assure you that the governments of the three countries will take whatever steps are necessary to make sure that the clients and the employees of Dexia can have trust in that bank, as we did in 2008,” Frieden said in an interview with Bloomberg Television today in Luxembourg. “All options are on the table in a constructive manner to make sure that the bank in whole or in part will remain a very serious financial institution.”


Luxembourg at 'AAA'

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 open economy, high income, robust economic growth, low public debt and net external creditor status," says Gergely Kiss, Director in Fitch's Sovereigns group. "The financial sector, which is exceptionally large as Luxembourg is the centre of the EU investment funds industry, has largely recovered from the crisis, underpinning the resilience of Luxembourg's economic model," adds Kiss.

Luxembourg's economy grew by 3.5% in 2010, significantly above the euro area average of 1.7%. Buoyant growth since Q409 means that GDP exceeded the peak before the financial crisis of 2008 by end-2010. Fitch expects even higher growth in 2011 of 3.8%, mainly due to strong base effects from Q410. However, beyond 2011 Fitch forecasts a gradual slowdown of the economy, in line with the weaker euro area outlook. Luxembourg has an impressive track record of prudent fiscal policy. General government debt was 18% of GDP in 2010, the lowest among 'AAA' rated sovereigns. After a long period of budget surpluses before the financial crisis of 2008, the budget deficit remained modest during the recession, peaking at 1.7% of GDP in 2010. Nevertheless, in the long term, Luxembourg has to address sizeable contingent liabilities in its pension system. The combination of generous pension rules and the ageing society would, in a no-policy-change scenario, lead to unsustainable debt dynamics, even taking into account the social security reserves, which reached 28% of GDP in 2010.

Total banking profit increased by 87% in 2010 from 2009, albeit unevenly spread and overall system capital adequacy remained stable. Investment funds' activity exceeds pre-crisis peaks both in term of total assets and the number of funds. Nonetheless, given the financial sector's dominant role, the economy remains exposed to financial stability risks. An important lesson from the 2008-09 financial crisis is that shocks outside the authorities' control could trigger a need for public intervention and recapitalisation, leading potentially to a sharp increase in public debt. Luxembourg has a strong external balance sheet. Its net international investment position was equal to 96% of GDP in 2010. The current account has been in surplus for more than 20 years and reached 7.8% of GDP in 2010. Furthermore, 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.


Luxembourg wants to revive Turkey’s EU visa facilitation talks

Luxembourg has urged both Turkey and the European Union to start talks on visa facilitation for Turkish nationals travelling to the Schengen area while simultaneously enforcing a readmission agreement for illegal immigrants. Luxembourg Prime Minister Jean Claude Juncker said at a joint news conference with his Turkish counterpart on Thursday that Turkey and the EU should fix a visa system for Turkish nationals and said both the visa-exemption deal and readmission agreement must satisfy both sides.

The EU has said Turkey first needs to finalize a readmission agreement for illegal immigrants with the 27-member bloc before starting visa-facilitation talks for Turkish nationals. Although Turkey completed talks with the EU on the readmission agreement, it cannot find an appropriate interlocutor in Brussels to start visa facilitation talks; a situation which Turkey says shows the EU's unwillingness to move forward on the issue. Juncker and Erdoğan both had bilateral talks earlier in the day and with their delegations. Pointing to what he said are “very good” relations between Turkey and the EU member state, Juncker also spoke about the necessity to improve economic ties between the two countries.

Recalling an earlier visit by his country's finance minister, Juncker said the finance minister will visit Turkey again in the spring of next year and thus will help accelerate economic ties. Noting that relations with respect to financial services and the banking sector will accelerate, Juncker said a new agreement on this issue will be rapidly implemented. Further speaking about economic relations between the two countries, Erdoğan said Turkey and Luxembourg are planning to reach $500 million in the level of trade volume, up from the current $140 million. Recalling that Juncker visited Turkey back in 2003, Erdoğan said Turkey has changed much since then and that he also visited Luxembourg before becoming prime minister in 2003. Erdoğan added that he can define relations between the two countries as excellent and that the two countries could discuss international and regional issues at the meeting.

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