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Luxembourg report Luxembourg report
by Euro Reporter
2012-09-29 11:26:38
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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 outlines UN bid

Grand Duke Henri of Luxembourg addressed the UN General Assembly on Wednesday morning, championing the credentials of his small, land-locked western European nation. 'Size does not matter when it comes to the commitment to effective multiculturalism,' His Royal Highness told the General Assembly in his native French. Finland, Luxembourg and Australia are competing for two permanent seats on the Security Council for a 2013-14 term. 'Since its accession among the founding members in 1945, Luxembourg's action in the UN can be summarised by three key words: commitment, solidarity, responsibility,' the Duke said, in support of what would be the country's first term with the Council.

'Eleven years ago, building on its commitment to peacekeeping operations and peace building activities, Luxembourg declared its candidature for ... the period 2013-14.' Henri outlined Luxembourg's achievement of Millennium Development Goals ahead of the 2015 deadline, which has also been a selling point of Prime Minister Julia Gillard's bid for Australia.

He mentioned the country's commitment to peace, gender equality, reaching climate change benchmarks, fighting global poverty and conflict, and as an aid donor. However, the Duke's regal roots set Luxembourg's bid apart from Australia. 'My family is proud to participate in this movement of solidarity ... towards developing countries,' Henri said. 'My wife, the Grand Duchess, invests herself fully in the social sectors as an Eminent Advocate for Children for UNICEF, notably in Burundi. 'She has been passionate about microfinance for many years and has achieved numerous projects in this field.'


Cost of Luxembourg's royal wedding is revealed as excitement builds

With less than a month to go until Hereditary Grand Duke Guillaume weds Countess Stephanie de Lannoy, part of the cost of their celebrations has been revealed. The Luxembourg state said it is contributing €350,000 Euros to the two-day event taking place on October 19 and 20. At a press conference, a minister justified the donation, saying the marriage was "the beginning of an important stage in the life of the heir to the throne, in the history of monarchy and the country in general,"

Public funds from the world's second richest country will be used to cover security, organisation of the religious ceremony in the cathedral, and the dinner following the civil ceremony. Despite this generous contribution, The Grand Ducal family – led by Guillaume's parents Grand Duke Henri and Grand Duchess Maria Teresa – will foot most of the bill of the lavish nuptials of Europe’s last single heir.  They will be responsible for paying for the accommodation and travel arrangements of foreign guests, among whom are likely to be a glittering array of European royals.

Proceedings begin on the afternoon of Friday 19 October with a civil ceremony in Luxembourg’s City Hall, where huge crowds are expected to gather for a glimpse of the couple. In the evening, a lavish banquet will be held at the Grand Ducal Palace. The next day, Guillaume and Stephanie will have a religious ceremony in the Our Lady Cathedral and will conclude their union with another joyous reception at the Palace. Luxembourg prepares to celebrate despite the untimely death of Stephanie’s mother, Countess Alix, who died of a stroke in August aged 70.

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