Abstract
The staff report for the 2010 Article IV Consultation underlies a thorough and objective view of the macroeconomic situation in Luxembourg and the challenges the economy is facing. The country’s enviable position of public finances at the onset of the crisis provided the space to accommodate fiscal support to the economy, enhance social transfers, and protect household income. Executive Directors recommended a sharper focus on liquidity and credit risks arising from banks’ sizable and concentrated exposures to their foreign parent groups.
I. Executive Summary and Staff Appraisal
1. The global financial crisis delivered a severe shock to Luxembourg’s exceptionally open economy and internationally-integrated financial center. Private investment plummeted and consumption weakened in the face of slowing employment growth. At the height of the crisis, Luxembourg’s sizeable investment fund industry endured substantial redemptions and its foreign-subsidiary dominated banking system experienced a sharp drop in its aggregate balance sheet as well as in its off-balance sheet positions. As a result, the economy contracted by 3½ percent in 2009.
2. Still, a prompt and aggressive policy response safeguarded the financial sector and mitigated adverse economic effects. The authorities’ decisive actions early on limited potential spillover effects. A five-fold increase in the deposit guarantee, combined with the ECB’s emergency liquidity provision, served to restore confidence in the financial sector. In addition, Luxembourg’s enviable fiscal position at the outset of the crisis enabled fiscal policy to provide substantial support to the economy, including by boosting social transfers to soften the impact on the labor force and protect household income.
3. After navigating through its worst performance in 30 years, Luxembourg’s economy has since stabilized. No bank rescues were required in 2009 and investment fund assets have rebounded to close to their pre-crisis peak. Thanks also to developments in neighboring countries, growth resumed early in the second half of 2009 and labor markets showed initial signs of recovery.
4. The global financial crisis, nonetheless, will have lasting effects on the economy. Systemic financial risks have abated in line with global developments and bank deleveraging has remained orderly and gradual. A number of institutions have continued unwinding noncore activities and refocusing their business models and improving efficiency, and declines in financial sector employment have been gradual. Despite ongoing bank restructuring, the financial center’s business model has not changed substantially. Banks continue to have large and concentrated cross-border positions with foreign parent banks. Lingering uncertainty in global financial markets and potential knock-on effects on neighboring countries as well as ongoing international regulatory initiatives on liquidity and leverage weigh on Luxembourg’s growth prospects.
5. The crisis has revealed the need to strengthen key aspects of the prudential and supervisory framework. The EU incorporation and business orientation of the majority of parent banks and long-standing collaboration between local and home country supervisors facilitated responding to the crisis. But there is need to strengthen regulations and supervisory focus on liquidity and credit risks. Regarding the former, sharpening the focus on liquidity risks originating from large interbank and notably intra-group exposures will require revamping the prudential framework governing quantitative aspects of liquidity risk and bank reporting processes. In addition, continued cooperation between the Banque Centrale du Luxembourg (BCL) and the Commission de Surveillance du Secteur Financier (CSSF) in monitoring and assessing liquidity risk will be essential and can benefit from the support of a formal agreement. Regarding tail credit risks, there is a need to further step up efforts in assessing banks’ credit risk management practices and, when needed, taking action to ensure the adequacy of bank capital. In this connection, promptly transposing forthcoming EU directives and Basel Committee of Banking Supervision recommendations on the level and quality of capital buffers and potential restrictions on leverage will be essential.
6. Improvements in the supervisory process and regulatory environment should go hand in hand with increased reliance on joint work with home supervisors. Given the cross-border nature of Luxembourg’s banking groups, the importance of strengthening collaboration with fellow supervisors and actively engaging in the work of relevant supervisory colleges cannot be overstated. The CSSF’s participation in these colleges provides a new avenue to intensify collaboration with home supervisors and further strengthen supervision.
7. In addition, the crisis highlighted the necessity of establishing formal mechanisms for cross-border bank resolution and burden sharing. Given the prevalence of foreign-owned subsidiaries, the effectiveness of resolution and crisis management efforts in response to systemic events hinges on an active coordination with home-country authorities. The formalization of agreements on burden sharing, the harmonization across crisis resolution frameworks, and the development of consistent mechanisms for crisis management and bank resolution extend beyond the domain of Luxembourg’s authorities. Given the critical importance of these matters, Luxembourg’s continued active engagement in these discussions is paramount.
8. While fiscal support to the economy is appropriate in the short term, the 2011 budget must set the stage for sustainable fiscal consolidation. Even though the economy is projected to strengthen, on unchanged policies, the fiscal deficit is poised to remain above or close to the Maastricht limit. Still, consistent with the Stability and Growth Pact (SGP) update, the authorities are committed to begin consolidation in 2011 and reestablish a balance by 2014. In this regard, the recently announced 2011–12 consolidation measures to rationalize current expenditures and share the burden of the adjustment across social partners are welcome. As the authorities acknowledge, achieving a balance in 2014 will require additional measures and these should focus more directly on current expenditure. Fiscal consolidation can be also supported by a medium-term framework to facilitate expenditure review and prioritization and provide a tool for early detection of adjustment needs.
9. Enduring fiscal stability requires, nonetheless, substantive pension reform. Gains in life expectancy combined with generous benefits will place considerable pressure on Luxembourg’s pay-as-you-go pension system. Reforms should aim at gradually increasing the effective and statutory retirement age including by eliminating design features that encourage early retirement and improving the alignment of benefits and contributions. There will also be a need to rein in the rate of increase of existing old-age pensions. Introducing periodic reviews of the social security’s financial health would enable timely adjustments to reflect economic and demographic developments. The global financial crisis’ adverse impact on employment growth prospects and social security contributions from cross-border workers has heightened the urgency of putting in place reforms early.
10. Looking forward, the resilience of Luxembourg’s economy will depend on cultivating its comparative advantage in high value added niche activities. Years of economic boom had masked the need for continued improvements in productivity. But global deleveraging, the restructuring of the global financial landscape, and the international push to harmonize taxation and limit bank secrecy will challenge some segments of the financial center. In this regard, the authorities’ proposal to adjust the backward-looking wage indexation mechanism would represent an essential step to limit its adverse impact on competitiveness. Further adjustments will be needed to modernize wage-setting mechanisms with a view of eliminating automatic indexation over time. In addition, gains in productivity can be generated by a business friendly environment supportive of investment in research and development and the acquisition of new skills by the labor force. This can help alleviate labor skill mismatches, but determined efforts will be needed to safeguard the advantages accumulated through years of experience as a financial center, curtail unemployment among residents and sustain Luxembourg’s prosperity.
11. It is recommended that the Article IV consultation remain on a 12-month cycle.
II. Context
12. Luxembourg’s large financial system plays a central role in the economy. The financial system consists of a sizeable investment fund industry—Europe’s largest with a portfolio equivalent to 50 times GDP—and a vast outward-oriented banking industry with 150 banks and an aggregate balance sheet of almost 30 times GDP. The investment fund and banking industries are closely intertwined, channeling large cross-border investment flows in the EU, mainly through international interbank and money markets.1 Interconnections between banks and their sponsored investment funds are diverse and result in sizeable cross sector exposures. The financial sector’s dynamism reflects a number of factors, including early transposition of the EU passport for investment funds, a multilingual and skilled labor force, an efficient regulatory environment, low taxation, and bank privacy legislation.2 The financial system has been the main driver of economic growth in the past two decades and its competitiveness has been central to the economy (Box 1).
Banking Sector Assets
(Dec 2009)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Contribution of the Financial Sector to the Economy
In Percent, 2007
Contribution of the Financial Sector to the Economy
In Percent, 2007
| Direct | Indirect | Total | |
|---|---|---|---|
| Value Added | 39 | 6 | 45 |
| Employment | 13 | 8 | 21 |
| Tax Revenues | 29 | 5 | 34 |
Contribution of the Financial Sector to the Economy
In Percent, 2007
| Direct | Indirect | Total | |
|---|---|---|---|
| Value Added | 39 | 6 | 45 |
| Employment | 13 | 8 | 21 |
| Tax Revenues | 29 | 5 | 34 |
13. The global financial crisis posed a severe test to Luxembourg’s financial sector. Luxembourg’s investment fund industry endured substantial redemptions totaling about three times GDP. In addition, Luxembourg’s foreign-subsidiary dominated banking sector has experienced a 20 percent contraction in its aggregate balance sheet (equivalent to four times GDP) as a result of deleveraging and restructuring. Banks have also seen a 30 percent drop in their off-balance sheet positions as assets under management dwindled. At the height of the global financial turmoil, several banks experienced severe liquidity shortages, the systemically important subsidiaries of Dexia and Fortis succumbed to pressure from a severe loss of investor confidence at the group level and three Icelandic subsidiaries failed (Box 2). The crisis revealed weaknesses in risk management practices in the banking system, unwarranted liquidity transformation by some institutions and gaps in the prudential framework and financial sector supervision, particularly regarding liquidity and credit risks.
Evolution of the Investment Fund Industry
(in billion euros)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: Haver; and IMF staff estimates.14. The authorities’ aggressive policy response limited the impact of the crisis. Decisive action in tackling troubled banks, in concert with the authorities of Belgium, France, and the Netherlands, quelled potential spillover effects and maintained the financial center’s stability. In addition, a five-fold increase in the deposit guarantee—in line with an EU-wide initiative—combined with the ECB’s monetary policy easing and emergency liquidity provision safeguarded banking sector confidence.3 Automatic fiscal stabilizers were allowed to operate fully and welfare and work-support programs boosted expenditures, resulting in a fiscal balance deterioration of 3¼ percent of GDP in 2009. Luxembourg’s fiscal surplus, enviably low public debt, and significant financial assets—almost 10 percent of GDP held by the central government—provided the short-term fiscal space needed to accommodate the expansion.
Luxembourg, Discretionary Fiscal Stimulus Measures
Including research and development
CIT rate reduction from 22 to 21 percent
Luxembourg, Discretionary Fiscal Stimulus Measures
| Fiscal Impact (percent of GDP) | |||||||
|---|---|---|---|---|---|---|---|
| 2009 (Art. IV) |
2009 (actual) |
2009 (diff.) |
2010 (budget) |
||||
| Expenditure side | 1.5 | 0.9 | -0.5 | 0.9 | |||
| Transfers to households | 0.7 | 0.5 | -0.2 | 0.3 | |||
| Transfers to business | 0.1 | 0.1 | 0.0 | 0.1 | |||
| Public investment 1/ | 0.6 | 0.3 | -0.3 | 0.5 | |||
| Revenue side | -1.5 | -1.5 | 0.0 | -0.5 | |||
| Personal income taxes | -1.2 | -1.2 | 0.0 | 0.0 | |||
| Indexation of the tax brackets | -0.9 | -0.9 | 0.0 | 0.0 | |||
| Increased tax credits | -0.3 | -0.3 | 0.0 | 0.0 | |||
| Corporate income taxes | -0.3 | -0.3 | 0.0 | -0.5 | |||
| Abolition of the capital contribution tax | -0.3 | -0.3 | 0.0 | 0.0 | |||
| CIT rate reduction (from 22 to 21 percen | 0.0 | 0.0 | 0.0 | -0.5 | |||
| Total fiscal Impact | 3.0 | 2.4 | -0.5 | 1.4 | |||
| memo: | |||||||
| Public sector balance | -3.3 | -0.7 | 2.6 | -3.9 | |||
| GDP growth | -5.3 | -3.4 | 1.9 | 3.0 | |||
Including research and development
CIT rate reduction from 22 to 21 percent
Luxembourg, Discretionary Fiscal Stimulus Measures
| Fiscal Impact (percent of GDP) | |||||||
|---|---|---|---|---|---|---|---|
| 2009 (Art. IV) |
2009 (actual) |
2009 (diff.) |
2010 (budget) |
||||
| Expenditure side | 1.5 | 0.9 | -0.5 | 0.9 | |||
| Transfers to households | 0.7 | 0.5 | -0.2 | 0.3 | |||
| Transfers to business | 0.1 | 0.1 | 0.0 | 0.1 | |||
| Public investment 1/ | 0.6 | 0.3 | -0.3 | 0.5 | |||
| Revenue side | -1.5 | -1.5 | 0.0 | -0.5 | |||
| Personal income taxes | -1.2 | -1.2 | 0.0 | 0.0 | |||
| Indexation of the tax brackets | -0.9 | -0.9 | 0.0 | 0.0 | |||
| Increased tax credits | -0.3 | -0.3 | 0.0 | 0.0 | |||
| Corporate income taxes | -0.3 | -0.3 | 0.0 | -0.5 | |||
| Abolition of the capital contribution tax | -0.3 | -0.3 | 0.0 | 0.0 | |||
| CIT rate reduction (from 22 to 21 percen | 0.0 | 0.0 | 0.0 | -0.5 | |||
| Total fiscal Impact | 3.0 | 2.4 | -0.5 | 1.4 | |||
| memo: | |||||||
| Public sector balance | -3.3 | -0.7 | 2.6 | -3.9 | |||
| GDP growth | -5.3 | -3.4 | 1.9 | 3.0 | |||
Including research and development
CIT rate reduction from 22 to 21 percent
Competitiveness
Since 2000, REER measures have exhibited an appreciation trend. Labor hoarding explains part of the strong increase in unit labor costs since 2007. Nonetheless, unit labor costs have exhibited sharper increases over time compared to Luxembourg’s main competitors, reflecting slower productivity gains and higher wages—as a rapidly expanding financial sector pressured labor markets. Since 2005, the manufacturing sector’s competitiveness has also deteriorated as unit labor costs have increased. This has hurt Luxembourg’s EU export market share since 2006, even though its share of world merchandise exports remains stable. While Luxembourg boasts the highest productivity in the EU, its productivity measurement tends to be biased by the relative importance of the financial sector—with inherent difficulties in calculating and interpreting estimates of financial sector unit labor costs.
Overall, CGER estimates do not point to a competitiveness gap but the assessment is complicated by the large size of the financial sector. The global financial crisis and its impact on the determinants of the equilibrium real exchange rate—particularly on global asset returns and growth prospects—have meant that there is a higher than usual degree of uncertainty in assessing the equilibrium level of the exchange rate. Luxembourg’s medium-term balance of payments projections have larger than usual forecasting uncertainties, notably due to the size and volatility of investment income and exports of financial services. Moreover, as in other financial centers, it should be noted that the high level of NFA reached in 2008 increases the estimated equilibrium current account under the ES approach, implying a small depreciation to bring the actual current account into line with its norm.
CGER Assessment of Competitiveness
CGER Assessment of Competitiveness
| Estimate | ||
|---|---|---|
| Average competitiveness gap (in percent) |
|
|
| Macroeconomic balance approach |
|
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| Equilibrium real exchange rate approach |
|
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| External stability approach |
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| Memorandum items: | ||
| Assessment of competitiveness gap | About zero | |
| Current account norm (percent of GDP) |
|
|
| Projected current account (percent of GDP) |
|
|
CGER Assessment of Competitiveness
| Estimate | ||
|---|---|---|
| Average competitiveness gap (in percent) |
|
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| Macroeconomic balance approach |
|
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| Equilibrium real exchange rate approach |
|
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| External stability approach |
|
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| Memorandum items: | ||
| Assessment of competitiveness gap | About zero | |
| Current account norm (percent of GDP) |
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| Projected current account (percent of GDP) |
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Resolution of Troubled Banks
The resolution of the troubled institutions—three Icelandic banks, Fortis, and Dexia—is proceeding as planned. Specifically:
The restructuring plan of Glitnir Bank Luxembourg was ratified in court in April 2009, and all depositors have been reimbursed.
The restructuring of Kaupthing Bank Luxembourg was ratified in July 2009. The company was split into two entities: a bank that started its activities in July 2009 as Banque Havilland and a special purpose vehicle (SPV) that is planned to be unwound over time. Interbank deposits were transferred to the SPV and will be redeemed as assets are sold or mature. All other depositors were either reimbursed or transferred to Banque Havilland.
The liquidation of Landsbanki Luxembourg was ordered in December 2008, and the unwinding is ongoing. All insured deposits have been paid.
The banking and insurance businesses of Fortis were split up. BNP Paribas acquired majority stakes in the former, including its Luxembourg subsidiary BGL.
Dexia is currently reorganizing and deleveraging, including through the controlled scaling down of portfolios and operations. The authorities are closely following these restructuring processes in cooperation with other relevant supervisors.
In addition, close monitoring continues for a few banks with idiosyncratic difficulties, including locally-incorporated subsidiaries of German Landesbanken, which jointly represent about 12 percent of system assets.
15. Financial conditions have stabilized in 2009. No further bank rescues have been required. Liquidity shortages have vanished and upstream liquidity provision to European parent banks from Luxembourg’s financial center has remained a structural feature of the system. Net inflows to the investment fund industry have resumed in the second quarter of 2009 and remained strong with the assets rebounding to about 90 percent of their October-2007 peak. With improving conditions in financial markets, mark-to-market losses in banks’ proprietary investment portfolios have been partially reversed. Emergency liquidity provision has been winding down in an orderly manner, and public guarantees in support of weak banks are expected to expire, as planned, in late 2010.
16. Luxembourg’s economy, nevertheless, endured its worst performance in 30 years. Reflecting its reliance on external markets—exports of goods and services represent about 150 percent of GDP—the economy contracted for five consecutive quarters ending in the second quarter of 2009. Private investment plummeted. Private consumption weakened as large employment losses were experienced in manufacturing and construction despite employment subsidies (partial-work programs). Unemployment rose by 1½ percentage points to 6 percent. While growth resumed in the second half of the year, output fell by 3½ percent in 2009. Inflation declined sharply and, helped also by falling world energy prices, briefly turned negative in mid-2009. Underlying inflation remained on a downward trend.
17. Domestic credit markets have shown only mild signs of a credit crunch. The bulk of bank’s balance sheet retrenchment has taken place against financial counterparts, with comparatively little spillover to domestic credit markets. Bank lending spreads have fallen below 200 basis points and compare favorably to their pre-crisis level. Credit quality in domestic retail portfolios remains high with loan impairments below 1 percent despite a recent uptick. The relative resilience of the domestic market reflects a number of factors, notably low household indebtedness and a moderate drop in house prices compared to other countries.
Selected Exposures of the Banking System, 2009
Selected Exposures of the Banking System, 2009
| Share of Total Bank Assets | Percentage of GDP | Percent Change (y/y) | ||||
|---|---|---|---|---|---|---|
| Interbank Exposure | 47.0 | 1006.2 | -20.6 | |||
| Loans to the Non Banking Sector | 23.6 | 503.8 | -8.3 | |||
| Luxembourg | 7.9 | 169.1 | -2.8 | |||
| of which: Corporates | 1.8 | 39.0 | -11.8 | |||
| Households | 2.4 | 51.3 | 8.1 | |||
| Eurozone | 9.7 | 207.0 | -8.6 | |||
| Rest of the World | 6.0 | 127.7 | -14.4 | |||
Selected Exposures of the Banking System, 2009
| Share of Total Bank Assets | Percentage of GDP | Percent Change (y/y) | ||||
|---|---|---|---|---|---|---|
| Interbank Exposure | 47.0 | 1006.2 | -20.6 | |||
| Loans to the Non Banking Sector | 23.6 | 503.8 | -8.3 | |||
| Luxembourg | 7.9 | 169.1 | -2.8 | |||
| of which: Corporates | 1.8 | 39.0 | -11.8 | |||
| Households | 2.4 | 51.3 | 8.1 | |||
| Eurozone | 9.7 | 207.0 | -8.6 | |||
| Rest of the World | 6.0 | 127.7 | -14.4 | |||
III. Outlook
18. A nascent externally-driven recovery is underway. Luxembourg experienced mild positive growth in the second half of 2009, with the financial and manufacturing sectors leading the way. Business and consumer confidence indicators have also strengthened but, despite recovering housing prices, mixed signals from the construction sector continue. The labor market remains weak but has shown signs of an incipient stabilization and the number of applications for, and use of, short-term work schemes has declined.
19. Growth will remain below its pre-crisis pace in 2010-11. With the impact of the global financial turmoil slowly receding, and economic conditions gradually improving in Europe, banking sector activity and merchandise exports are projected to continue along mild upward trends. The central scenario envisages 2010-11 growth to average about 3 percent, with a turnaround in the inventory cycle and carry-over growth (about 1⅔ percent) providing a boost in 2010. In addition, the 2010 budget envisages continued stimulus. Still, investment is not expected to experience a sustained expansion following a turnaround in the inventory cycle and private consumption will remain subdued in line with continued labor market sluggishness. The gradual strengthening of growth in 2011 is predicated on continued improvement in European trading partners and a mild recovery of private consumption and investment. While inflation is envisaged to remain subdued it has gradually picked up since February bringing forward the next automatic wage adjustment to the summer of 2010.
Luxembourg: GDP Growth, 2009-11
In percent
Contribution to GDP Growth
Luxembourg: GDP Growth, 2009-11
In percent
| 2009 | 2010 | 2011 | ||
|---|---|---|---|---|
| (projections) | ||||
| Gross domestic product | -3.4 | 3.0 | 2.8 | |
| Total domestic demand | -5.1 | 5.1 | 3.2 | |
| Private consumption | -0.5 | 4.5 | 2.6 | |
| Gross fixed investment | -3.3 | -1.5 | 4.5 | |
| Inventory accumulation 1/ | -1.3 | 0.4 | 0.0 | |
| Foreign balance 1/ | 0.8 | -0.5 | 0.4 | |
| Exports of goods and nonfactor services | -7.6 | 3.6 | 4.5 | |
| Imports of goods and nonfactor services | -9.2 | 4.5 | 5.0 | |
| Memo items: | ||||
| General government balance | -0.7 | -3.7 | -4.8 | |
| Current account balance | 5.6 | 5.5 | 5.7 | |
Contribution to GDP Growth
Luxembourg: GDP Growth, 2009-11
In percent
| 2009 | 2010 | 2011 | ||
|---|---|---|---|---|
| (projections) | ||||
| Gross domestic product | -3.4 | 3.0 | 2.8 | |
| Total domestic demand | -5.1 | 5.1 | 3.2 | |
| Private consumption | -0.5 | 4.5 | 2.6 | |
| Gross fixed investment | -3.3 | -1.5 | 4.5 | |
| Inventory accumulation 1/ | -1.3 | 0.4 | 0.0 | |
| Foreign balance 1/ | 0.8 | -0.5 | 0.4 | |
| Exports of goods and nonfactor services | -7.6 | 3.6 | 4.5 | |
| Imports of goods and nonfactor services | -9.2 | 4.5 | 5.0 | |
| Memo items: | ||||
| General government balance | -0.7 | -3.7 | -4.8 | |
| Current account balance | 5.6 | 5.5 | 5.7 | |
Contribution to GDP Growth
20. Risks to the outlook continue to stem primarily from lingering uncertainty in global financial markets and are skewed to the downside. Luxembourg’s financial system has been recovering; systemic risks have abated, and bank deleveraging remains orderly and gradual. In addition, a number of institutions have been unwinding non-core activities, refocusing their business models and improving efficiency. Still, the structure and risks associated to the business model of Luxembourg’s financial center have not changed substantially. Locally-incorporated subsidiaries maintain large and concentrated interbank exposures—mainly with their parent groups abroad—and remain exposed to the underlying risks of the latter. Assessing these risks challenges local supervisors.
21. Capital buffers are high but the adequacy of capital differs across institutions. Overall solvency ratios appear to be adequate to withstand tail credit losses stemming from retail and credit portfolios without threatening financial stability.4 Still, stress tests conducted by CSSF show a wide dispersion of capital adequacy across banks even though these tests do not reflect credit and liquidity risks originating from intra-group exposures. In addition, despite substantial deleveraging—exceeding 250 percent of GDP in 2009—leverage ratios remain high and disperse. The authorities have requested capital add-ons for a few institutions that were found to be vulnerable to credit risk of their household and corporate portfolios. Moreover, a group of banks appears to be excessively exposed to corporate risk originating from cross-border lending in neighboring countries. Local subsidiaries are also exposed to interest rate risk from maturity and duration mismatches but this risk is less important in relative terms.
22. Market distress originating from sovereign risk in Europe could pose risks to Luxembourg’s financial sector. Spillover effects could rekindle turbulence in global financial markets and in Luxembourg’s financial system. In the event that several sovereigns face difficulties simultaneously, these effects would be particularly challenging and would entail recapitalizing a number of banks.5 In addition, the locally-incorporated subsidiaries are vulnerable as these are exposed to indirect risks stemming from their parent bank’s exposure to sovereign and corporate credit risk. Exposures to sovereign risk in the portfolios of investment funds are also significant and could entail legal and reputational risks to their sponsoring banks.
23. The authorities shared the view that the short term outlook had improved but underscored that downside risks remain. They noted that projections for 2010 are subject to large uncertainties, in particular due to the bearing of financial sector conditions on macroeconomic outcomes, the role of inventories and carry over growth, and the volatility and frequent revisions of national accounts. With respect to the financial system, the authorities stressed that the combination of improved liquidity and high capital ratios—in particular tier one—provide some comfort regarding banking system’s capacity to withstand shocks. Cognizant of the risks associated with large sovereign exposures, they noted, however, that these risks are not Luxembourg specific and have remained contained, and supervision has stepped up surveillance and guidance to individual banks regarding sovereign exposures.
IV. Policy Challenges
A. The Financial System
24. The financial system has served Luxembourg’s economy well, but the global financial crisis has highlighted the associated risks and policy challenges. The sheer size of the financial system vis-a-vis the economy entails potentially large contingent fiscal liabilities and exacerbates the “too big to fail” problem. Moreover, Luxembourg’s flexible and business-oriented regulatory environment—perceived as a key element of the financial center’s attractiveness—has allowed banks to centrally manage risks resulting in potentially large liquidity and maturity mismatches in local bank’s balance sheets.
25. A number of risk-mitigating factors are at play, but revisions in key aspects of the prudential framework are needed. The EU incorporation and business orientation of the majority of parent banks and a history of close collaboration between Luxembourg’s supervisors and those of home countries provide some reassurance. Still, the crisis uncovered weaknesses in the prudential and supervisory frameworks governing liquidity risk and intra-group exposures, as well as in bank’s risk management practices. Recent improvements in CSSF’s on-site and off-site supervision have stemmed from a more hands on approach and hiring additional expert staff. In addition, the authorities have been developing quantitative tools to monitor and assess liquidity and credit risks, including stress tests. Nonetheless, there is a need to tighten three aspects of the prudential regulatory environment:
Risks originating from the sizable interbank exposures must be tackled. Of particular attention are liquidity risks generated by the large intra-group transactions of locally-incorporated subsidiaries. Tackling these risks in the context of the supervisory process, as planned, is welcomed, but a case can be made for enhancing the required capital and liquidity buffers associated with these positions. In addition, other prudential responses to mitigate risks associated with intra-group exposures should be considered and weighed against possible adverse effects on the financial center.
Capital buffers should be better aligned with tail risks in the context of ongoing international initiatives. Despite high capital adequacy ratios in the banking system, leverage ratios are high and disperse, prompting questions regarding the suitability of the structure of risk weights and their level. In addition, the substantial variation in internal rating-based (IRB) estimates across banks, and their limited sensitivity to the current downturn, suggests that banks may be underestimating risk and calls for closer analysis in coordination with home supervisors. The CSSF’s focus on banks active in the domestic retail market and the introduction of capital add-ons based on the assessment of bank risk profiles have been appropriate. Forthcoming recommendations from CEBS and the Basel Committee on the level and quality of capital buffers, and possible restrictions on leverage, should be transposed into local regulations promptly as planned.
Regulations on quantitative aspects of liquidity risk should move forward. Recently-enacted regulations on qualitative aspects of liquidity risk address key aspects of bank liquidity management. New regulations establish a mandatory regime of liquidity buffers and banks are now required to treat intra-group exposures explicitly in their liquidity risk management. These regulations assign a proactive role to local management and board regarding liquidity risk and establish a set of principles for collateral management. Still, available prudential indicators are backward looking and fail to capture key aspects of liquidity risk, notably those stemming from off-balance sheet accounts and intra-group positions. In this regard, a new set of indicators should be developed to facilitate the assessment of liquidity risks in individual banks as well as system-wide, exploiting forward-looking information from the contingent liquidity plans of banks and their responses to distressed scenarios. In addition, there is a need to further step up on-site inspections to assess bank’s liquidity management and prepare comprehensive liquidity assessments.
Distribution of Capital to Asset Ratios
In percent, 2009
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Note: Capital to asset ratios are computed as shareholders’ capital over total assets.Source: Commission de Surveillance du Secteur Financier.26. Improvements in the supervisory process should go hand in hand with increased reliance on joint work and information exchange with home supervisors. Locally-incorporated banks are heavily exposed to the parent institution’s underlying risks and key risk management is centralized at the banking group level. The assessment of the quality of bank’s risk management systems must be conducted at the group level, which will require a fluid exchange of information and collaboration between home and host supervisors. In this context, the authorities are encouraged to continue strengthening collaboration with fellow supervisors and ensuring that supervisory colleges provide a sound platform for risk assessment of large financial groups. The long-standing relationships between the CSSF and peer supervisors proved extremely useful during the crisis and must be further reinforced.
27. Institutional aspects of the supervisory process also need reinforcement.
Enhancing the collaboration between the BCL and the CSSF in monitoring and assessing liquidity risks. The BCL has created two units entrusted with assessing macro-financial stability and monitoring systemic liquidity risk. The latter complements the micro-prudential work carried out by the CSSF and its effectiveness will depend on adequate information exchange and close inter-institutional coordination. In this regard, formalizing the ongoing cooperation and exchange of information between the BCL and the CSSF would be advisable.
Revamping the deposit guarantee in line with international best practices. The funds set aside by banks through provisions for the deposit guarantee scheme (AGDL) proved essential in honoring all insured deposits in recent bank failures. The intention to replace the current system with a pre-funded scheme through risk-based contributions with a borrowing capacity and the ability to support early resolutions on a least-cost principle would strengthen the financial safety net. The implementation of the new scheme should be in line with forthcoming EU guidelines and mindful to avoid overburdening banks’ profitability and their ability to extend credit.
28. The crisis also highlighted the importance of establishing formal mechanisms for cross-border bank resolution and burden-sharing. Given the size of the financial sector and the prevalence of foreign-owned subsidiaries, the effectiveness of resolution and crisis management efforts in response to a systemic event hinges on an active coordination with home-country authorities. The harmonization of the crisis resolution frameworks across the EU, the formalization of agreements on burden sharing, and the development of consistent mechanisms for crisis management cross-border bank resolution across the EU are of paramount importance for Luxembourg. These matters extend beyond the domain of Luxembourg and the authorities should remain actively engaged in the EU-level discussions.
29. Regarding Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), a number of weaknesses were identified in the Financial Action Task Force’s (FATF’s) recently published evaluation. The ROSC will be circulated to the Board in due course and the authorities are urged to fully implement the FATF’s recommendations.
30. While the authorities shared the thrust of staff’s assessment, they pointed to features of the financial center that lessen risks. Specifically, they considered that risks associated with large positions with parent banks are mitigated by the structural excess liquidity in the system, and noted the ongoing strengthening of liquidity management by the local subsidiaries. Similarly, they stressed that the banking sector’s capital buffers are high and an international consensus has not yet emerged on the definition of leverage ratios. The authorities indicated that several ongoing regulatory initiatives in Luxembourg—in particular on capital, liquidity ratios and deposit insurance—would be implemented as soon as new EU directives were issued. Still, they expressed concern, not just for Luxembourg but also for Europe, about a possibly simultaneous implementation of numerous new financial system regulations. They advocated instead for a gradual application at the EU level, mindful of country-specific features of the financial system and of the potential impact on the economy. The authorities noted their commitment to fully implement the FATF’s recommendations.
B. Fiscal Exit Strategy and Long-Run Sustainability
31. Fiscal policy faces a dilemma. Fiscal tightening could threaten a weak recovery and prolong labor market sluggishness in 2010. However, allowing fiscal deficits to run unchecked would result in deeper fiscal adjustment in coming years as sharp increases in public spending are expected and make fiscal consolidation and pension reform unavoidable.
Growth of General Government Total Expenditure
(Percent change)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
32. On balance, continued fiscal support is appropriate in the short term. Luxembourg’s low gross public debt, while rising, still provides near-term fiscal space for continuing counter cyclical policy. Indeed, the 2010 budget entails the fiscal deficit widening to almost 4 percent of GDP. This reflects expenditure increases of ¾ percent of GDP, equally split between wages and public investment, and a drop in revenues of 2 percent of GDP, reflecting the lagged effects of the crisis on corporate tax collections, which are based on profits from the previous five years. To the extent that economic conditions differ from the central scenario, automatic stabilizers should be allowed to operate fully in the upturn.
General Government Deficit and Gross Debt, 2009
(percent of GDP)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: Datainsight; and IMF staff calculations.33. The 2011 budget should, however, set the stage for lasting fiscal consolidation. With the delayed impact of the recession continuing to weigh on revenues, the fiscal deficit is poised to widen further in 2011 despite the gradual economic recovery. In the absence of fiscal adjustment, the structural deficit is expected to remain high, exceeding or near the Maastricht limit and leading to a doubling in gross public debt in five years. Moreover, in the medium term tax revenues are expected to gradually decline as the financial sector’s role in the economy wanes.
General Government Balance
(percent of GDP)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: Ministry of Finance; and IMF staff estimates.Selected Countries: Wages in the Public and Private Sectors
(Percentage change, 1999-2008)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Selected Countries: General Government Expenditure, Per Capita
(PPP, in euros)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: ECB; European Commission; Eurostat; and BCL.34. In this regard, there is a pressing need to articulate an expenditure-based consolidation strategy. The most recent update of the Stability and Growth Program confirms the authorities’ goal to balance the budget by 2014, implying an annual deficit reduction of about 1 percent of GDP. Provided the fiscal consequences of aging are addressed through substantive pension reform, the target provides an apt benchmark to stabilize public debt at about 30 percent of GDP. The recently concluded tripartite discussions on fiscal measures failed to reach agreement between the social partners. The authorities, however, have announced a number of measures focusing on the expenditure side. Besides establishing a cap on public investment, fiscal consolidation will seek to rationalize current expenditure, social transfers and subsidies, centering on tackling the large deficit at the central government level. Proposed tax measures center on increasing the highest PIT marginal rate, introducing a new top marginal rate for high-income households and a crisis tax on earnings, and boosting the solidarity tax. Still, additional current expenditure adjustment will be needed to balance the budget by 2014.
35. Revamping Luxembourg’s medium-term fiscal framework would support fiscal adjustment. The budget process entails an annual exercise with budget documents outlining a three-year capital-spending program. Introducing forward-looking elements have been considered, notably limiting central government expenditures increases to long-run output growth. But far more would be needed to establish a medium-term fiscal framework that, supported by medium-term targets and revenue projections, would enhance expenditure review and prioritization, facilitate early detection of adjustment needs, and safeguard fiscal sustainability. In line with international best practices, such a framework would be characterized by binding multi-year expenditure ceilings.
Selected Countries: Gross Replacement Rate for Pensions
(Male, average wage, in percent)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Selected Countries: Effective and Statutory Retirement Ages
(Men, 2007)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: OECD.36. Still, enduring fiscal stability requires substantive pension reform. The pension system generates an annual surplus of about 2 percent of GDP, but surpluses have been shrinking steadily. Gains in life expectancy—10 years in the past 30 years—and generous benefits, including high replacement rates, will continue placing pressure on the pay-as-you-go system. With the highest age-related increases in the EU, official projections for the current system show social security deficits emerging in 15 years and reserves being exhausted in 25 years (Box 3). Against this background, reforms will need to aim for gradually increasing the effective (currently 60 years) and statutory retirement age of 65 including by eliminating design features that encourage early retirement, and improving the alignment of benefits and contributions. In addition, while social partners engaged in quadripartite discussions to devise long-term solutions to contain health care costs, the financial situation of the health care system may require increasing contributions to ensure financial equilibrium in the short term. Putting in place reforms early on will facilitate desirable phasing-in of adjustments and establishing periodic reviews of the social security’s financial health can enable timely adjustments in light of economic and demographic developments. Moving ahead promptly can also avoid the need for radical measures as the peak of the fiscal impact of aging nears.
Impact of Age-Related Expenditures on Public Finances
The adverse impact of aging on public finances is the largest in the EU. The authorities’ and EC’s calculations project that over the 2060 horizon, age-related spending will increase by about 18 percent of GDP, of which 80 percent corresponds to old-age pensions and 7 percent to health care. The level of health care expenditures would remain slightly below the EU average.
EU Member States: Estimated Impact of Ageing on Social Expenditures
(change in percent of GDP)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: European Commission; and Luxembourg Ministry of FinanceLuxembourg: Estimated Level of Social Expenditure
(in percent of GDP)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
The social security system has accumulated large reserves but these will not suffice to finance the gap. The system has been consistently running surpluses that have resulted in growing reserves, which are projected to reach 28 percent of GDP in 2010 and peak at 46 percent of GDP in 2020. However, the social security budget balance is expected to be in deficit from 2025 onwards and, other things being equal, the reserves will be depleted around 2035.
EU Member States: Social Security Pension Assets
(in percent of GDP, 2007)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: European Commission; and Luxembourg Ministry of Finance.Luxembourg: Social Security Reserves
(in percent of GDP)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
The crisis, moreover, has made the problem more acute. This reflects primarily a 1% percentage point drop in potential growth. The impact of aging also hinges on the health of the financial sector and the continued development of Luxembourg’s financial center as past social security surpluses were largely due to a young and rapidly expanding population of cross-border financial sector workers. Indeed, 41 percent of pensioners are now non residents and represent 21 percent of pension outlays. A sudden decline in the number of cross border workers would significantly raise the dependency ratio.
Sharp increases in age-related spending reflect the generosity of the system. Compounded by the increasing life expectancy of its beneficiaries, Luxembourg’s pension system is characterized by a high replacement ratio—the 4th highest in the OECD, after Greece, Iceland and the Netherlands—and low levels of labor force participation, particularly between the ages of 55 and 64 years.
37. The authorities concurred with the need to consolidate fiscal accounts and preserve fiscal sustainability in the face aging-related expenditure pressures. They noted that the fiscal stimulus had been beneficial—in particular to mitigate the effects of the crisis on employment. The authorities were mindful of restoring the financial health of fiscal accounts that had been achieved by prudent fiscal management. They stressed that their policies created the fiscal space that enabled them to counteract the effects of downturn, particularly its impact on household income. Still, given the openness of Luxembourg’s economy, the authorities expressed reservations regarding fiscal policy’s counter-cyclical role. They underscored the importance of containing the tax burden in the medium term and restoring debt sustainability, including by running fiscal surpluses. The authorities also noted that the adoption of a medium-term fiscal framework may help in securing a continued adjustment. Regarding the adjustment, they expressed their firm commitment to consolidate fiscal accounts and take action on aging related reforms by end-2010.
C. Fostering Long-Run Growth
38. Luxembourg’s financial-sector led growth faces headwinds from global deleveraging and an international push to harmonize taxation and enhance bank transparency. Even before the crisis, international calls to eliminate or severely limit tax advantages and ease bank privacy legislation had not augured well for Luxembourg’s above-average economic growth. Parts of retail and private banking had already started to adjust. In the wake of the global financial crisis, financial institutions worldwide have continued deleveraging further eroding Luxembourg’s growth prospects. Available estimates suggest that a 1-percent decline in financial sector value added slows economic growth by about ½ percentage points in a year’s time, with smaller losses in two subsequent years. But, in line with the international experience, the financial crisis will likely entail a lasting impact on output reflecting a shift toward a less exuberant financial activity, a lower expansion of the cross border labor force and declines in productivity. While Luxembourg may be able to keep and attract back office and related services—increasing under pressure from lower cost countries—the economy’s growth potential has declined: official estimates lowered long-run growth by between 1½ and 2 percentage points to 2½ percent. Although difficult to estimate, the estimated impact appears commensurate with the size of Luxembourg’s financial sector and available cross-county evidence.
Corporate Tax Rates for Selected Countries
(Percent of Profits)
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
1/ Unweighted average.Source: World Bank Doing Business, 2010Estimates of the Impact of Financial Crises on Economic Output
Estimates of the Impact of Financial Crises on Economic Output
| Impact on output | Studies | ||
|---|---|---|---|
| Luxembourg | Potential growth slows from 4.5 percent in 2007 to 2.7 percent in 2020 and 2 percent afterwards | Luxembourg’s 11th SGP Update | |
| Potential growth declines to 2.2 percent between 2012 and 2030, assuming constant labor force | BCL (2010) | ||
| Potential growth lower by 1 percent by 2011 | Statec (2009) | ||
| Decline by 1 percent in financial sector value added leads to GDP decline of 0.6 percent in the first year and 0.3 percent the following two years | Statec (2009) | ||
| Economies with large financial sectors | |||
| Belgium | Potential growth slows from 1.9 percent in 2007 to between 0.7 and 0.8 percent before gradually returning to potential growth pre crisis trend of 1.5 percent | IMF 2009 Article IV Consultation | |
| UK | Potential growth lowered by 1-1.5 percent to 0.25-1.25 percent in 2010 and to 1.75-2.25 percent in the medium term | IMF 2009 Article IV Consultation | |
| Switzerland | Potential growth lowered by 1.25 in 2009 and by 1/2 percent over the medium term | IMF 2010 Article IV Consultation | |
| Cross country studies | |||
| Eurozone + Denmark, Sweden, UK | Potential growth in 2009 and 2010 lowered to 0.7-0.8 percent from 1.3-1.6 percent | European Commission (2009) | |
| OECD | Potential output lower by 1.5 to 2.4 percent on average, 4 percent for severe crises | Furceri and Mourougane (OECD, 2009) | |
| Advanced and Emerging economies | Output loss is 10 percent on average 7 years after a banking crisis | IMF WEO (October 2009) | |
Estimates of the Impact of Financial Crises on Economic Output
| Impact on output | Studies | ||
|---|---|---|---|
| Luxembourg | Potential growth slows from 4.5 percent in 2007 to 2.7 percent in 2020 and 2 percent afterwards | Luxembourg’s 11th SGP Update | |
| Potential growth declines to 2.2 percent between 2012 and 2030, assuming constant labor force | BCL (2010) | ||
| Potential growth lower by 1 percent by 2011 | Statec (2009) | ||
| Decline by 1 percent in financial sector value added leads to GDP decline of 0.6 percent in the first year and 0.3 percent the following two years | Statec (2009) | ||
| Economies with large financial sectors | |||
| Belgium | Potential growth slows from 1.9 percent in 2007 to between 0.7 and 0.8 percent before gradually returning to potential growth pre crisis trend of 1.5 percent | IMF 2009 Article IV Consultation | |
| UK | Potential growth lowered by 1-1.5 percent to 0.25-1.25 percent in 2010 and to 1.75-2.25 percent in the medium term | IMF 2009 Article IV Consultation | |
| Switzerland | Potential growth lowered by 1.25 in 2009 and by 1/2 percent over the medium term | IMF 2010 Article IV Consultation | |
| Cross country studies | |||
| Eurozone + Denmark, Sweden, UK | Potential growth in 2009 and 2010 lowered to 0.7-0.8 percent from 1.3-1.6 percent | European Commission (2009) | |
| OECD | Potential output lower by 1.5 to 2.4 percent on average, 4 percent for severe crises | Furceri and Mourougane (OECD, 2009) | |
| Advanced and Emerging economies | Output loss is 10 percent on average 7 years after a banking crisis | IMF WEO (October 2009) | |
39. Luxembourg’s resilience as an economic and financial center will depend on cultivating its comparative advantage in niche activities. Years of experience have resulted in considerable expertise in accounting, legal, and back office services that can support new niche activities and underpin future growth. To safeguard these advantages and foster a flexible economy, there will be a need to address skill mismatches with a view to curtail high unemployment among residents. This should be complemented by an agreement among social partners to moderate wage increases and eliminate automatic backward-looking wage indexation over time. In this regard, the authorities’ proposal to adjust the price index is a welcome step to limit its adverse effects on competiveness.6
40. The authorities agreed that the global financial crisis may represent a paradigm shift for the Luxembourg financial center but it also provides opportunities to continue building on its success. The authorities considered fostering the economy’s competitiveness as a top priority and shaped a substantial part of the government program around continuously monitoring the situation on the ground and proposing innovative solutions as needed. They noted that flexibility was needed to continue building and taking advantage of high-value added opportunities, particularly when a number of regulatory changes are in train. Although views differ on the extent of the deterioration in competitiveness and the solutions to remedy it, social partners agreed that the comparative advantage of Luxembourg’s economy lies on high value added activities, supported by a highly educated workforce. Initiatives to develop financial sector niche activities are ongoing. However, some of these activities could have low employment content and thus the authorities noted the need for continued gains in productivity and wage restraint. They expressed, nonetheless, their commitment to automatic wage indexation mechanism for social cohesion, with the proposed adjustments serving to mitigate adverse effects on competitiveness.
Luxembourg: Confidence Indicators
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: Eurostat.Luxembourg: High Frequency Financial Indicators
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: Thomson Financial/Reuters/Datastream.Luxembourg: Aggregate Banking Sector Assets and Funding
Citation: IMF Staff Country Reports 2010, 161; 10.5089/9781455207268.002.A001
Source: IFS; and IMF staff estimates.Luxembourg: Basic Data, 2006–11
Contribution to GDP growth.
Overall economy.
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
For 2010, data refer to February.
Luxembourg: Basic Data, 2006–11
| Est. | Proj. | |||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||
| Real Economy (change in percent) | ||||||||
| Gross domestic product | 5.6 | 6.5 | 0.0 | -3.4 | 3.0 | 2.8 | ||
| Total domestic demand | 2.1 | 4.3 | 3.2 | -5.1 | 5.1 | 3.2 | ||
| Private consumption | 2.7 | 2.8 | 3.9 | -0.5 | 4.5 | 2.6 | ||
| Public consumption | 2.8 | 2.9 | 3.0 | 2.9 | 2.6 | 1.5 | ||
| Gross investment | 0.8 | 7.6 | 2.3 | -17.1 | 8.7 | 5.4 | ||
| Foreign balance 1/ | 3.6 | 3.1 | -2.4 | 0.8 | -0.5 | 0.4 | ||
| Exports of goods and nonfactor services | 13.3 | 8.8 | 1.5 | -7.6 | 3.6 | 4.5 | ||
| Imports of goods and nonfactor services | 12.9 | 8.3 | 3.3 | -9.2 | 4.5 | 5.0 | ||
| Employment and unemployment (thousands, unless indicated) | ||||||||
| Resident labor force | 212.5 | 217.3 | 223.2 | 226.7 | 230.0 | 233.5 | ||
| Unemployed | 9.5 | 9.6 | 9.9 | 16.2 | 14.7 | 13.7 | ||
| (As a percent of total labor force) | 4.5 | 4.4 | 4.4 | 7.1 | 6.4 | 5.8 | ||
| Resident employment | 203.1 | 207.7 | 213.3 | 210.5 | 215.3 | 219.8 | ||
| (change in percent) | 2.2 | 2.3 | 2.7 | -1.3 | 2.3 | 2.1 | ||
| Cross-border workers (net) | 115.9 | 125.5 | 135.4 | 131.3 | 132.7 | 132.9 | ||
| Total employment | 319.0 | 333.2 | 348.7 | 341.8 | 348.0 | 352.8 | ||
| (Change in percent) | 3.6 | 4.5 | 4.7 | -2.0 | 1.8 | 1.4 | ||
| Prices and costs (change in percent) | ||||||||
| CPI (harmonized), p.a. | 2.3 | 2.2 | 2.3 | 2.5 | 2.6 | 2.7 | ||
| CPI (national definition), p.a. | 2.7 | 2.3 | 3.4 | 0.4 | 2.0 | 1.5 | ||
| Average nominal wage growth 2/ | 3.3 | 3.5 | 2.1 | 1.9 | 0.0 | 2.3 | ||
| Nominal unit labor costs 2/ | -4.8 | -1.2 | 1.9 | 4.1 | -6.5 | 2.3 | ||
| Public finances (percent of GDP) 3/ | ||||||||
| General government revenues | 39.7 | 39.8 | 40.1 | 41.6 | 37.7 | 36.8 | ||
| General government expenditures | 38.3 | 36.2 | 37.2 | 42.4 | 41.4 | 41.6 | ||
| General government balance | 1.4 | 3.6 | 2.9 | -0.7 | -3.7 | -4.8 | ||
| General government gross debt | 6.5 | 6.7 | 13.7 | 16.4 | 19.6 | 24.1 | ||
| Balance of Payments (percent of GDP) | ||||||||
| Current account | 10.3 | 9.7 | 5.3 | 5.6 | 5.5 | 5.7 | ||
| Balance on goods | -10.0 | -9.4 | -10.9 | -8.0 | -9.0 | -9.3 | ||
| Balance on services | 48.6 | 53.8 | 51.7 | 47.7 | 42.4 | 40.9 | ||
| Net factor income | -25.6 | -30.3 | -30.8 | -31.3 | -23.7 | -21.7 | ||
| Balance on current transfers | -2.7 | -4.3 | -4.7 | -2.7 | -4.2 | -4.2 | ||
| Exchange rates 4/ | ||||||||
| U.S. dollar per euro | 1.3 | 1.4 | 1.5 | 1.4 | 1.4 | … | ||
| percent change | 0.8 | 9.2 | 7.4 | -5.4 | -7.0 | … | ||
| Nominal effective rate (2005=100) | 100.2 | 101.5 | 103.0 | 103.1 | 102.3 | |||
| percent change | 0.2 | 1.3 | 1.5 | 0.1 | -0.7 | … | ||
| Real effective rate (CPI based; 2005=100) | 100.9 | 102.3 | 104.0 | 104.4 | 103.7 | |||
| percent change | 0.9 | 1.3 | 1.7 | 0.4 | -0.2 | … | ||
| Interest rates 4/ | ||||||||
| Government bond yield | 3.9 | 4.6 | 4.2 | 4.2 | 3.7 | … | ||
| Memorandum items: Land area = 2,586 square kilometers; population in 2008 = 488 thousand; GDP per capita = €75,066 | ||||||||
Contribution to GDP growth.
Overall economy.
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
For 2010, data refer to February.
Luxembourg: Basic Data, 2006–11
| Est. | Proj. | |||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||
| Real Economy (change in percent) | ||||||||
| Gross domestic product | 5.6 | 6.5 | 0.0 | -3.4 | 3.0 | 2.8 | ||
| Total domestic demand | 2.1 | 4.3 | 3.2 | -5.1 | 5.1 | 3.2 | ||
| Private consumption | 2.7 | 2.8 | 3.9 | -0.5 | 4.5 | 2.6 | ||
| Public consumption | 2.8 | 2.9 | 3.0 | 2.9 | 2.6 | 1.5 | ||
| Gross investment | 0.8 | 7.6 | 2.3 | -17.1 | 8.7 | 5.4 | ||
| Foreign balance 1/ | 3.6 | 3.1 | -2.4 | 0.8 | -0.5 | 0.4 | ||
| Exports of goods and nonfactor services | 13.3 | 8.8 | 1.5 | -7.6 | 3.6 | 4.5 | ||
| Imports of goods and nonfactor services | 12.9 | 8.3 | 3.3 | -9.2 | 4.5 | 5.0 | ||
| Employment and unemployment (thousands, unless indicated) | ||||||||
| Resident labor force | 212.5 | 217.3 | 223.2 | 226.7 | 230.0 | 233.5 | ||
| Unemployed | 9.5 | 9.6 | 9.9 | 16.2 | 14.7 | 13.7 | ||
| (As a percent of total labor force) | 4.5 | 4.4 | 4.4 | 7.1 | 6.4 | 5.8 | ||
| Resident employment | 203.1 | 207.7 | 213.3 | 210.5 | 215.3 | 219.8 | ||
| (change in percent) | 2.2 | 2.3 | 2.7 | -1.3 | 2.3 | 2.1 | ||
| Cross-border workers (net) | 115.9 | 125.5 | 135.4 | 131.3 | 132.7 | 132.9 | ||
| Total employment | 319.0 | 333.2 | 348.7 | 341.8 | 348.0 | 352.8 | ||
| (Change in percent) | 3.6 | 4.5 | 4.7 | -2.0 | 1.8 | 1.4 | ||
| Prices and costs (change in percent) | ||||||||
| CPI (harmonized), p.a. | 2.3 | 2.2 | 2.3 | 2.5 | 2.6 | 2.7 | ||
| CPI (national definition), p.a. | 2.7 | 2.3 | 3.4 | 0.4 | 2.0 | 1.5 | ||
| Average nominal wage growth 2/ | 3.3 | 3.5 | 2.1 | 1.9 | 0.0 | 2.3 | ||
| Nominal unit labor costs 2/ | -4.8 | -1.2 | 1.9 | 4.1 | -6.5 | 2.3 | ||
| Public finances (percent of GDP) 3/ | ||||||||
| General government revenues | 39.7 | 39.8 | 40.1 | 41.6 | 37.7 | 36.8 | ||
| General government expenditures | 38.3 | 36.2 | 37.2 | 42.4 | 41.4 | 41.6 | ||
| General government balance | 1.4 | 3.6 | 2.9 | -0.7 | -3.7 | -4.8 | ||
| General government gross debt | 6.5 | 6.7 | 13.7 | 16.4 | 19.6 | 24.1 | ||
| Balance of Payments (percent of GDP) | ||||||||
| Current account | 10.3 | 9.7 | 5.3 | 5.6 | 5.5 | 5.7 | ||
| Balance on goods | -10.0 | -9.4 | -10.9 | -8.0 | -9.0 | -9.3 | ||
| Balance on services | 48.6 | 53.8 | 51.7 | 47.7 | 42.4 | 40.9 | ||
| Net factor income | -25.6 | -30.3 | -30.8 | -31.3 | -23.7 | -21.7 | ||
| Balance on current transfers | -2.7 | -4.3 | -4.7 | -2.7 | -4.2 | -4.2 | ||
| Exchange rates 4/ | ||||||||
| U.S. dollar per euro | 1.3 | 1.4 | 1.5 | 1.4 | 1.4 | … | ||
| percent change | 0.8 | 9.2 | 7.4 | -5.4 | -7.0 | … | ||
| Nominal effective rate (2005=100) | 100.2 | 101.5 | 103.0 | 103.1 | 102.3 | |||
| percent change | 0.2 | 1.3 | 1.5 | 0.1 | -0.7 | … | ||
| Real effective rate (CPI based; 2005=100) | 100.9 | 102.3 | 104.0 | 104.4 | 103.7 | |||
| percent change | 0.9 | 1.3 | 1.7 | 0.4 | -0.2 | … | ||
| Interest rates 4/ | ||||||||
| Government bond yield | 3.9 | 4.6 | 4.2 | 4.2 | 3.7 | … | ||
| Memorandum items: Land area = 2,586 square kilometers; population in 2008 = 488 thousand; GDP per capita = €75,066 | ||||||||
Contribution to GDP growth.
Overall economy.
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
For 2010, data refer to February.
Luxembourg: General Government Operations, 2006–14 1/
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
Luxembourg: General Government Operations, 2006–14 1/
| Est. | Proj. | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||
| (In percent of GDP) | ||||||||||||
| Revenue | 39.7 | 39.8 | 40.1 | 41.6 | 37.7 | 36.8 | 37.4 | 37.8 | 38.1 | |||
| Tax revenue | 25.4 | 25.5 | 25.2 | 25.8 | 22.8 | 21.7 | 22.3 | 22.8 | 23.3 | |||
| Indirect taxes | 12.5 | 12.4 | 11.8 | 11.9 | 11.0 | 10.6 | 10.6 | 10.6 | 10.6 | |||
| Direct taxes | 12.9 | 13.0 | 13.4 | 13.9 | 11.8 | 11.2 | 11.7 | 12.2 | 12.7 | |||
| Social security contributions | 10.7 | 10.7 | 10.9 | 12.1 | 11.4 | 11.3 | 11.3 | 11.2 | 11.0 | |||
| Other revenue | 3.5 | 3.7 | 3.9 | 3.7 | 3.4 | 3.7 | 3.7 | 3.8 | 3.8 | |||
| Expenditure | 38.3 | 36.2 | 37.2 | 42.4 | 41.4 | 41.6 | 41.5 | 41.4 | 41.0 | |||
| Current expenditure | 36.0 | 34.6 | 35.5 | 40.5 | 39.2 | 39.3 | 39.2 | 39.0 | 38.5 | |||
| Wages and salaries | 7.3 | 7.1 | 7.1 | 7.9 | 7.8 | 7.8 | 7.7 | 7.6 | 7.6 | |||
| Goods and services | 3.0 | 3.0 | 3.2 | 3.6 | 3.6 | 3.5 | 3.5 | 3.5 | 3.5 | |||
| Social transfers and pensions | 18.1 | 17.3 | 18.1 | 20.7 | 19.7 | 19.7 | 19.5 | 19.5 | 19.3 | |||
| Social security benefits | 15.8 | 15.1 | 15.8 | 17.8 | 18.2 | 18.4 | 18.7 | 18.9 | 19.2 | |||
| Interest payments | 0.2 | 0.2 | 0.3 | 0.5 | 0.4 | 0.5 | 0.7 | 0.9 | 1.1 | |||
| Other current expenditure | 7.3 | 7.0 | 6.8 | 7.8 | 7.7 | 7.8 | 7.6 | 7.5 | 7.0 | |||
| Net acquisition of nonfinancial assets | 2.3 | 1.6 | 1.7 | 1.9 | 2.2 | 2.3 | 2.3 | 2.4 | 2.5 | |||
| Overall balance | 1.4 | 3.6 | 2.9 | -0.7 | -3.7 | -4.8 | -4.1 | -3.7 | -2.8 | |||
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
Luxembourg: General Government Operations, 2006–14 1/
| Est. | Proj. | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||
| (In percent of GDP) | ||||||||||||
| Revenue | 39.7 | 39.8 | 40.1 | 41.6 | 37.7 | 36.8 | 37.4 | 37.8 | 38.1 | |||
| Tax revenue | 25.4 | 25.5 | 25.2 | 25.8 | 22.8 | 21.7 | 22.3 | 22.8 | 23.3 | |||
| Indirect taxes | 12.5 | 12.4 | 11.8 | 11.9 | 11.0 | 10.6 | 10.6 | 10.6 | 10.6 | |||
| Direct taxes | 12.9 | 13.0 | 13.4 | 13.9 | 11.8 | 11.2 | 11.7 | 12.2 | 12.7 | |||
| Social security contributions | 10.7 | 10.7 | 10.9 | 12.1 | 11.4 | 11.3 | 11.3 | 11.2 | 11.0 | |||
| Other revenue | 3.5 | 3.7 | 3.9 | 3.7 | 3.4 | 3.7 | 3.7 | 3.8 | 3.8 | |||
| Expenditure | 38.3 | 36.2 | 37.2 | 42.4 | 41.4 | 41.6 | 41.5 | 41.4 | 41.0 | |||
| Current expenditure | 36.0 | 34.6 | 35.5 | 40.5 | 39.2 | 39.3 | 39.2 | 39.0 | 38.5 | |||
| Wages and salaries | 7.3 | 7.1 | 7.1 | 7.9 | 7.8 | 7.8 | 7.7 | 7.6 | 7.6 | |||
| Goods and services | 3.0 | 3.0 | 3.2 | 3.6 | 3.6 | 3.5 | 3.5 | 3.5 | 3.5 | |||
| Social transfers and pensions | 18.1 | 17.3 | 18.1 | 20.7 | 19.7 | 19.7 | 19.5 | 19.5 | 19.3 | |||
| Social security benefits | 15.8 | 15.1 | 15.8 | 17.8 | 18.2 | 18.4 | 18.7 | 18.9 | 19.2 | |||
| Interest payments | 0.2 | 0.2 | 0.3 | 0.5 | 0.4 | 0.5 | 0.7 | 0.9 | 1.1 | |||
| Other current expenditure | 7.3 | 7.0 | 6.8 | 7.8 | 7.7 | 7.8 | 7.6 | 7.5 | 7.0 | |||
| Net acquisition of nonfinancial assets | 2.3 | 1.6 | 1.7 | 1.9 | 2.2 | 2.3 | 2.3 | 2.4 | 2.5 | |||
| Overall balance | 1.4 | 3.6 | 2.9 | -0.7 | -3.7 | -4.8 | -4.1 | -3.7 | -2.8 | |||
Fiscal projections are based on unchanged policies and thus do not reflect fiscal consolidation measures announced on May 5, 2010.
Luxembourg: External Current Account, 2006–14
Luxembourg: External Current Account, 2006–14
| Est. | Proj. | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||
| (In percent of GDP) | |||||||||||
| Current account | 10.3 | 9.7 | 5.3 | 5.6 | 5.5 | 5.7 | 6.1 | 6.6 | 7.0 | ||
| Balance on goods and services | 38.6 | 44.3 | 40.8 | 39.7 | 33.4 | 31.5 | 30.1 | 28.8 | 27.6 | ||
| Trade balance | -10.0 | -9.4 | -10.9 | -8.0 | -9.0 | -9.3 | -9.4 | -9.5 | -9.7 | ||
| Merch exports | 38.5 | 35.5 | 37.0 | 29.5 | 26.6 | 26.8 | 27.0 | 27.4 | 27.8 | ||
| Merch imports | 48.5 | 44.9 | 47.9 | 37.5 | 35.6 | 36.1 | 36.4 | 36.9 | 37.4 | ||
| Balance on services | 48.6 | 53.8 | 51.7 | 47.7 | 42.4 | 40.9 | 39.4 | 38.4 | 37.3 | ||
| Services exports | 118.2 | 127.5 | 123.0 | 116.1 | 105.2 | 104.4 | 104.4 | 105.7 | 107.3 | ||
| Services imports | 69.6 | 73.8 | 71.3 | 68.4 | 62.8 | 63.6 | 65.0 | 67.4 | 70.0 | ||
| Net factor income | -25.6 | -30.3 | -30.8 | -31.3 | -23.7 | -21.7 | -19.8 | -18.1 | -16.4 | ||
| Compensation of employees, net | -13.9 | -14.4 | -15.6 | -16.6 | -14.3 | -13.6 | -13.0 | -12.3 | -11.6 | ||
| Compensation of employees, credit | 3.1 | 3.0 | 2.9 | 3.2 | 3.1 | 3.1 | 3.1 | 3.0 | 3.0 | ||
| Compensation of employees, debit | 17.0 | 17.4 | 18.5 | 19.9 | 17.4 | 16.7 | 16.0 | 15.3 | 14.6 | ||
| Investment income, net | -11.7 | -15.8 | -15.2 | -14.7 | -9.5 | -8.1 | -6.9 | -5.8 | -4.8 | ||
| Investment income, credit | 296.9 | 324.5 | 345.7 | 263.0 | 243.7 | 234.1 | 224.7 | 214.7 | 204.9 | ||
| Investment income, debit | 308.7 | 340.3 | 360.9 | 277.7 | 253.2 | 242.2 | 231.6 | 220.5 | 209.7 | ||
| Balance on current transfers | -2.7 | -4.3 | -4.7 | -2.7 | -4.2 | -4.2 | -4.2 | -4.2 | -4.2 | ||
| Capital and financial account | -10.3 | -9.7 | -5.2 | -5.4 | -5.4 | -5.6 | -6.0 | -6.5 | -6.9 | ||
| Capital account | -0.9 | -0.4 | -0.6 | -0.7 | -0.1 | -0.1 | -0.1 | -0.1 | -0.1 | ||
| Financial account | -9.4 | -9.3 | -4.6 | -4.7 | -5.3 | -5.5 | -5.9 | -6.4 | -6.9 | ||
| Direct investment, net | 32.7 | -127.4 | -60.1 | -41.4 | -9.4 | -8.6 | -8.2 | -7.9 | -7.5 | ||
| Portfolio investment | 172.7 | 261.2 | 59.5 | 5.4 | -95.4 | -104.9 | -104.9 | -104.9 | -104.9 | ||
| Financial derivatives | 22.4 | 27.3 | -36.2 | -27.5 | -1.1 | -1.1 | -1.1 | -1.1 | -1.1 | ||
| Other investments | -237.3 | -170.4 | 32.2 | 58.8 | 100.6 | 109.1 | 108.3 | 107.4 | 106.7 | ||
| Change in reserve assets of the BCL | 0.1 | 0.2 | -0.2 | -0.2 | -0.1 | -0.1 | -0.1 | -0.1 | -0.1 | ||
| Errors and omissions | -0.1 | -0.2 | 0.1 | -0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Balance of payments | 0.0 | 0.0 | 0.2 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | ||
Luxembourg: External Current Account, 2006–14
| Est. | Proj. | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||
| (In percent of GDP) | |||||||||||
| Current account | 10.3 | 9.7 | 5.3 | 5.6 | 5.5 | 5.7 | 6.1 | 6.6 | 7.0 | ||
| Balance on goods and services | 38.6 | 44.3 | 40.8 | 39.7 | 33.4 | 31.5 | 30.1 | 28.8 | 27.6 | ||
| Trade balance | -10.0 | -9.4 | -10.9 | -8.0 | -9.0 | -9.3 | -9.4 | -9.5 | -9.7 | ||
| Merch exports | 38.5 | 35.5 | 37.0 | 29.5 | 26.6 | 26.8 | 27.0 | 27.4 | 27.8 | ||
| Merch imports | 48.5 | 44.9 | 47.9 | 37.5 | 35.6 | 36.1 | 36.4 | 36.9 | 37.4 | ||
| Balance on services | 48.6 | 53.8 | 51.7 | 47.7 | 42.4 | 40.9 | 39.4 | 38.4 | 37.3 | ||
| Services exports | 118.2 | 127.5 | 123.0 | 116.1 | 105.2 | 104.4 | 104.4 | 105.7 | 107.3 | ||
| Services imports | 69.6 | 73.8 | 71.3 | 68.4 | 62.8 | 63.6 | 65.0 | 67.4 | 70.0 | ||
| Net factor income | -25.6 | -30.3 | -30.8 | -31.3 | -23.7 | -21.7 | -19.8 | -18.1 | -16.4 | ||
| Compensation of employees, net | -13.9 | -14.4 | -15.6 | -16.6 | -14.3 | -13.6 | -13.0 | -12.3 | -11.6 | ||
| Compensation of employees, credit | 3.1 | 3.0 | 2.9 | 3.2 | 3.1 | 3.1 | 3.1 | 3.0 | 3.0 | ||
| Compensation of employees, debit | 17.0 | 17.4 | 18.5 | 19.9 | 17.4 | 16.7 | 16.0 | 15.3 | 14.6 | ||
| Investment income, net | -11.7 | -15.8 | -15.2 | -14.7 | -9.5 | -8.1 | -6.9 | -5.8 | -4.8 | ||
| Investment income, credit | 296.9 | 324.5 | 345.7 | 263.0 | 243.7 | 234.1 | 224.7 | 214.7 | 204.9 | ||
| Investment income, debit | 308.7 | 340.3 | 360.9 | 277.7 | 253.2 | 242.2 | 231.6 | 220.5 | 209.7 | ||
| Balance on current transfers | -2.7 | -4.3 | -4.7 | -2.7 | -4.2 | -4.2 | -4.2 | -4.2 | -4.2 | ||
| Capital and financial account | -10.3 | -9.7 | -5.2 | -5.4 | -5.4 | -5.6 | -6.0 | -6.5 | -6.9 | ||
| Capital account | -0.9 | -0.4 | -0.6 | -0.7 | -0.1 | -0.1 | -0.1 | -0.1 | -0.1 | ||
| Financial account | -9.4 | -9.3 | -4.6 | -4.7 | -5.3 | -5.5 | -5.9 | -6.4 | -6.9 | ||
| Direct investment, net | 32.7 | -127.4 | -60.1 | -41.4 | -9.4 | -8.6 | -8.2 | -7.9 | -7.5 | ||
| Portfolio investment | 172.7 | 261.2 | 59.5 | 5.4 | -95.4 | -104.9 | -104.9 | -104.9 | -104.9 | ||
| Financial derivatives | 22.4 | 27.3 | -36.2 | -27.5 | -1.1 | -1.1 | -1.1 | -1.1 | -1.1 | ||
| Other investments | -237.3 | -170.4 | 32.2 | 58.8 | 100.6 | 109.1 | 108.3 | 107.4 | 106.7 | ||
| Change in reserve assets of the BCL | 0.1 | 0.2 | -0.2 | -0.2 | -0.1 | -0.1 | -0.1 | -0.1 | -0.1 | ||
| Errors and omissions | -0.1 | -0.2 | 0.1 | -0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Balance of payments | 0.0 | 0.0 | 0.2 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | ||
Luxembourg: Financial Soundness Indicators, 2005–09
(In percent)
There is a break in the series in 2009 due to the adoption of IAS and IFRS in 2008.
Luxembourg: Financial Soundness Indicators, 2005–09
(In percent)
| 2005 | 2006 | 2007 | 2008 | 2009 1/ | |||
|---|---|---|---|---|---|---|---|
| Capital Adequacy | |||||||
| Regulatory capital to risk-weighted assets | 15.5 | 15.3 | 14.3 | 15.4 | 18.9 | ||
| Regulatory Tier 1 capital to risk-weighted assets | 12.9 | 12.7 | 12.2 | 13.0 | 16.5 | ||
| Capital to assets | 4.1 | 4.1 | 4.1 | 4.8 | 6.0 | ||
| Profitability And Efficiency | |||||||
| Return on assets | 0.7 | 0.9 | 0.8 | 0.2 | 0.6 | ||
| Return on equity | 17.0 | 22.1 | 20.4 | 5.5 | 11.6 | ||
| Interest margin to gross income | 25.1 | 26.2 | 27.0 | 37.7 | 36.5 | ||
| Trading income to total income | 5.6 | 4.9 | 1.9 | -8.9 | 5.6 | ||
| Noninterest expenses to gross income | 53.0 | 48.4 | 50.5 | 56.2 | 56.3 | ||
| Personnel expenses to noninterest expenses | 38.5 | 38.7 | 37.9 | 35.7 | 38.7 | ||
| Asset Quality And Structure | |||||||
| Nonperforming loans net of provisions to capital | 1.4 | 1.0 | 1.6 | … | 10.9 | ||
| Nonperforming loans to total gross loans | 0.2 | 0.1 | 0.2 | … | 1.3 | ||
| Residential real estate loans to total loans | 1.8 | 2.0 | 2.1 | 2.2 | 2.8 | ||
| Sectoral distribution of loans (in % of total loans) | |||||||
| Residents | 19.7 | 18.4 | 22.5 | 26.6 | 23.4 | ||
| Deposit Takers | 12.4 | 10.2 | 11.7 | 10.7 | 9.8 | ||
| Central Bank | 1.0 | 1.6 | 1.5 | 6.4 | 2.3 | ||
| Other Financial Corporations | 2.6 | 2.5 | 4.7 | 4.2 | 4.8 | ||
| General Government | 0.2 | 0.2 | 0.3 | 0.4 | 0.4 | ||
| Nonfinancial Corporations | 1.3 | 1.5 | 1.8 | 2.4 | 2.6 | ||
| Other Domestic Sectors | 2.2 | 2.4 | 2.5 | 2.6 | 3.4 | ||
| Non Residents | 80.3 | 81.6 | 77.5 | 73.4 | 76.6 | ||
| Liquidity | |||||||
| Liquid assets to total assets | 53.3 | 54.5 | 53.2 | 59.0 | 55.9 | ||
| Liquid assets to short-term liabilities | 64.3 | 66.0 | 64.1 | 67.8 | 64.7 | ||
| Customer deposits to total (non interbank) loans | 174.3 | 182.2 | 160.7 | 134.7 | 137.5 | ||
| Foreign Exchange | |||||||
| Foreign currrency denominated loans to total loans | 41.4 | 42.3 | 34.5 | 30.2 | 28.1 | ||
| Foreign currency denominated liabilities to total liabilities | 37.5 | 37.5 | 33.8 | 29.1 | 28.8 | ||
| Net open foreign exchange to capital | -7.8 | -14.0 | 3.1 | 1.6 | -0.6 | ||
| Other Indicators | |||||||
| Household debt to GDP | 41.8 | 40.5 | 45.3 | 48.3 | 52.2 | ||
| Spread between reference lending and deposit rates (in basis points) | 172 | 187 | 225 | 220 | 166 | ||
There is a break in the series in 2009 due to the adoption of IAS and IFRS in 2008.
Luxembourg: Financial Soundness Indicators, 2005–09
(In percent)
| 2005 | 2006 | 2007 | 2008 | 2009 1/ | |||
|---|---|---|---|---|---|---|---|
| Capital Adequacy | |||||||
| Regulatory capital to risk-weighted assets | 15.5 | 15.3 | 14.3 | 15.4 | 18.9 | ||
| Regulatory Tier 1 capital to risk-weighted assets | 12.9 | 12.7 | 12.2 | 13.0 | 16.5 | ||
| Capital to assets | 4.1 | 4.1 | 4.1 | 4.8 | 6.0 | ||
| Profitability And Efficiency | |||||||
| Return on assets | 0.7 | 0.9 | 0.8 | 0.2 | 0.6 | ||
| Return on equity | 17.0 | 22.1 | 20.4 | 5.5 | 11.6 | ||
| Interest margin to gross income | 25.1 | 26.2 | 27.0 | 37.7 | 36.5 | ||
| Trading income to total income | 5.6 | 4.9 | 1.9 | -8.9 | 5.6 | ||
| Noninterest expenses to gross income | 53.0 | 48.4 | 50.5 | 56.2 | 56.3 | ||
| Personnel expenses to noninterest expenses | 38.5 | 38.7 | 37.9 | 35.7 | 38.7 | ||
| Asset Quality And Structure | |||||||
| Nonperforming loans net of provisions to capital | 1.4 | 1.0 | 1.6 | … | 10.9 | ||
| Nonperforming loans to total gross loans | 0.2 | 0.1 | 0.2 | … | 1.3 | ||
| Residential real estate loans to total loans | 1.8 | 2.0 | 2.1 | 2.2 | 2.8 | ||
| Sectoral distribution of loans (in % of total loans) | |||||||
| Residents | 19.7 | 18.4 | 22.5 | 26.6 | 23.4 | ||
| Deposit Takers | 12.4 | 10.2 | 11.7 | 10.7 | 9.8 | ||
| Central Bank | 1.0 | 1.6 | 1.5 | 6.4 | 2.3 | ||
| Other Financial Corporations | 2.6 | 2.5 | 4.7 | 4.2 | 4.8 | ||
| General Government | 0.2 | 0.2 | 0.3 | 0.4 | 0.4 | ||
| Nonfinancial Corporations | 1.3 | 1.5 | 1.8 | 2.4 | 2.6 | ||
| Other Domestic Sectors | 2.2 | 2.4 | 2.5 | 2.6 | 3.4 | ||
| Non Residents | 80.3 | 81.6 | 77.5 | 73.4 | 76.6 | ||
| Liquidity | |||||||
| Liquid assets to total assets | 53.3 | 54.5 | 53.2 | 59.0 | 55.9 | ||
| Liquid assets to short-term liabilities | 64.3 | 66.0 | 64.1 | 67.8 | 64.7 | ||
| Customer deposits to total (non interbank) loans | 174.3 | 182.2 | 160.7 | 134.7 | 137.5 | ||
| Foreign Exchange | |||||||
| Foreign currrency denominated loans to total loans | 41.4 | 42.3 | 34.5 | 30.2 | 28.1 | ||
| Foreign currency denominated liabilities to total liabilities | 37.5 | 37.5 | 33.8 | 29.1 | 28.8 | ||
| Net open foreign exchange to capital | -7.8 | -14.0 | 3.1 | 1.6 | -0.6 | ||
| Other Indicators | |||||||
| Household debt to GDP | 41.8 | 40.5 | 45.3 | 48.3 | 52.2 | ||
| Spread between reference lending and deposit rates (in basis points) | 172 | 187 | 225 | 220 | 166 | ||
There is a break in the series in 2009 due to the adoption of IAS and IFRS in 2008.
Luxembourg-based banks maintain half of their assets (about ten times GDP) in the interbank market, mainly with their parent banks abroad. They are net providers of liquidity to parent banks and also play a central role in the recycling of liquidity from the investment fund industry to the EU banking systems.
Taxes on investment funds are based on the volume of the portfolios under management, with rates varying between 0–5 percent depending on the size and type of fund. The average effective tax rate is close to the lower end of the range as money market funds—subject to tax rates below 1 percent—account for the bulk of funds. Capital gains on investments held for at least two years are not subject to taxes in Luxembourg. But tax agreements with other jurisdictions result in taxes being owed in the foreign investor’s country of residence.
Financial support of 18.5 percent of GDP was approved, including recapitalization of about 6½ percent of GDP; the latter was among the highest in the EU as a share of GDP.
Overall, solvency ratios are high at about 17.5 percent and have experienced across-the-board improvement due to shrinking balance sheets and fresh capital injections. The distribution of capital has also improved, with only six banks operating with Basel ratios below 10 percent. As in other countries, however, equity capital to assets ratios are low and disperse, with several banks (including some systemically-important institutions) posting ratios below 3 percent. Average risk-weights on assets stand at about 20 to 30 percent.
Aggregated risk exposures of Luxembourg banks to sovereign risk from Greece, Ireland, Italy, Portugal, and Spain (GIIPS) represent about 3 percent of system assets and half of banks’ regulatory capital. These portfolios comprise public bond holdings (roughly 2/3 of the exposure to sovereigns) and direct credit to sub-national governments primarily to Italy and Spain. The CSSF reports that Luxembourg-based banks do not have material exposures to sovereign risk from GIIPS through derivatives.
Together with Belgium and Spain, Luxembourg is one of the three European countries with a dominant system of backward looking and automatic indexation mechanism.
