{
  "title": "Luxembourg - 2009 Article IV Consultation, IMF Concluding Statement",
  "publication": "IMF News, March 30, 2009",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs033009",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "authors": [
    "Gradual Recovery Notwithstanding"
  ],
  "publishDate": "2009-03-30",
  "sections": [
    {
      "heading": "Context and overarching assessment",
      "content": "- Mission location and date: Luxembourg, March 30, 2009.\n- Situation summary:\n  - Ongoing financial turmoil and the first global recession in 60 years pose daunting challenges to Luxembourg’s small open economy.\n  - The financial sector hosts 152 mostly foreign-owned subsidiary banks, Europe’s largest investment fund industry and second largest money market industry, and is fully exposed to the turmoil.\n  - Contraction in European demand is weighing heavily on Luxembourg’s traditional export sectors."
    },
    {
      "heading": "Key elements of a comprehensive crisis management strategy",
      "content": "- Core priorities:\n  - Resolving home-host country issues and seeking burden sharing commitments:\n    - The systemic nature of the crisis has called into question the axiom that parent companies would always support subsidiaries.\n    - Authorities need to advance burden sharing discussions with parent companies and home countries to achieve burden sharing commitments.\n  - Addressing risks from close integration of Luxembourg-based subsidiaries with parent groups:\n    - Intragroup exposures and group-level liquidity management have shifted liquidity risk onto subsidiaries.\n    - Requires comprehensive and continuous monitoring of liquidity at the local level and a regulatory framework with sufficient flexibility to account for bank-specific circumstances.\n    - Mission notes joint efforts of the central bank (Banque Centrale du Luxembourg) and the regulator (Commission de Surveillance du Secteur Financier) but stresses success depends on cooperation between these institutions.\n  - Reining in excessive leverage:\n    - More than half of Luxembourg’s banking system was overly leveraged at end-2008, with gearing ratios in excess of 20 times.\n    - While system-wide capital levels are sufficient, the mission calls for strengthening the regulatory regime, tightening capital requirements, and introducing binding limits on leverage.\n    - Such steps need international coordination and careful phasing to facilitate an orderly adjustment of banks’ balance sheets.\n  - Safeguarding Luxembourg’s reputation as a well run financial center:\n    - Money market funds (MMFs) provided more than 100 billion euro in mostly short-term financing to euro area banks, making MMF instability a systemic risk to the euro area.\n    - Authorities should seek international cooperation focused on burden sharing arrangements that would allow—the mission states—in case of strong redemptive pressures—the immediate issuance of a credible, multilateral guarantee to cover those funds’ liabilities.\n    - Weakened capitalization limits scope for banks to take MMFs’ assets onto their balance sheets; the need for a liquidity facility should be further explored."
    },
    {
      "heading": "Financial sector findings and vulnerabilities",
      "content": "- Structural features and risks:\n  - Large, internationally integrated financial center with substantial intragroup exposures and liquidity centralized at group level.\n  - Excessive leverage in a sizable portion of the banking system (see: more than half overly leveraged at end-2008; gearing ratios in excess of 20 times).\n  - MMFs' significant short-term financing role (more than 100 billion euro) poses systemic risk to the euro area.\n- Regulatory implications:\n  - Need for enhanced local liquidity monitoring and a flexible yet robust regulatory framework.\n  - Coordination between Banque Centrale du Luxembourg and Commission de Surveillance du Secteur Financier is critical.\n  - International coordination required for capital and leverage measures and for multilateral crisis response mechanisms."
    },
    {
      "heading": "Growth outlook and macroeconomic projections",
      "content": "- Recession severity:\n  - Luxembourg faces its most severe recession since the steel crisis in the mid-1970s.\n  - Growth came to a sudden halt in the third quarter of 2008; contraction spreading across key export sectors, notably manufacturing and transport.\n  - Profitability in the financial sector is likely to decline in 2009 as banks’ interest income is adversely affected by appreciable declines in interest rates.\n- IMF-based projection:\n  - Based on the IMF’s current growth forecast for the euro area (-3.2 percent for 2009), the mission projects Luxembourg’s real growth to fall by 3.8 percent this year.\n  - A recovery is expected to begin in mid-2010, but annual growth is still likely to stagnate."
    },
    {
      "heading": "Fiscal position, stimulus, and transparency",
      "content": "- Fiscal stance and recent developments:\n  - Luxembourg’s public finances are much better positioned than most other EU countries; public debt stock remains low by international standards despite bank rescue efforts.\n  - Fiscal surplus fell to an estimated 1.4 percent of GDP in 2008 from 3.2 percent of GDP in 2007.\n- 2009 fiscal outlook:\n  - The combination of growth-induced revenue declines and fiscal stimulus of about 3 percent of GDP is projected to lead to an overall deficit of 3.2 percent of GDP in 2009.\n  - This exceeds the authorities’ revised budget forecast (-0.7 percent of GDP).\n- Mission recommendations on fiscal policy:\n  - The mission unequivocally supports the full functioning of the automatic stabilizers, given the economic situation and the favorable state of public finances.\n  - To enhance fiscal transparency, underlying budget assumptions—especially for GDP growth—and the projected fiscal deficit should be once more revised."
    },
    {
      "heading": "Need for post-crisis fiscal adjustment and structural reforms",
      "content": "- Fiscal sustainability risks and recommendations:\n  - Expenditures are rising: despite fiscal adjustment from the 2006 Tripartite Agreement, current spending returned to buoyant growth in 2008.\n  - Planned return to full indexation of wages and social benefits will likely exacerbate spending growth and hamper competitiveness.\n  - Uncertainties on medium-term fiscal revenues arise from potential global deleveraging and legal, prudential and regulatory changes—including those governing bank secrecy—affecting financial sector profitability and tax contributions.\n  - Changes in EU tax regulation, including the 2015 introduction of the end-user principle that will curtail VAT revenues, are noted as a concern.\n- Specific policy recommendations:\n  - Reconsider reintroduction of full inflation indexation of wages and benefits.\n  - Prioritize far-reaching reforms of the public, pay-as-you-go pension system to address substantial funding gaps and improve long-term viability.\n\nInternational Monetary Fund — Luxembourg, March 30, 2009.\n\n---\n\n\n References\n\n- Luxembourg and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs033009"
    }
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    "Authors: Gradual Recovery Notwithstanding",
    "Published: March 30, 2009",
    "Mission location and date: Luxembourg, March 30, 2009.",
    "Situation summary:",
    "Core priorities:",
    "Structural features and risks:",
    "Regulatory implications:",
    "Recession severity:",
    "IMF-based projection:",
    "Fiscal stance and recent developments:",
    "2009 fiscal outlook:",
    "Mission recommendations on fiscal policy:",
    "Fiscal sustainability risks and recommendations:",
    "Specific policy recommendations:",
    "[Luxembourg and the IMF](http://www.imf.org/external/country/LUX/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
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