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IMF Concludes 2009 Article IV Consultation With Luxembourg,
by Ulrika Lomas, Tax-News.com, Brussels
Friday, June 12, 2009
The IMF has concluded an Article IV consultation with Luxembourg. As a small open
economy, hosting Europe’s largest investment funds, second largest money
markets and many foreign-owned subsidiary banks, Luxembourg is fully exposed to
the ongoing financial turmoil and global recession, reports the IMF.
Luxembourg’s economy has outperformed most of the euro area in the recent
past, but with weakening activity in the financial system and falling export
demand, the IMF expects output to decline in excess of the euro area average
in 2009, and changes to the global and European financial architecture could
lower potential growth over the longer term. GDP declined by almost 1% in 2008,
while reduced demand pressures and the easing of commodity import prices sharply
reduced inflation. Despite forecasts of real GDP growth decline by another 5.25%,
a further contraction in the financial sector and continued weakness in external
demand, the substantial and well-designed fiscal stimulus measures are projected
to result in a budget deficit this year only marginally in excess of the Maastricht
ceiling. The public debt stock remains low
by international standards and provides ample scope to finance budgetary pressures
over the near term. The increase in the near-term financing requirement is not
expected to call into question fiscal sustainability.
The IMF regard financial stability to be a precondition for continued economic
success, and supported the recent successful interventions in the banking sector,
including the rescue of two major banks, and the initiative to improve banks’
liquidity management. The IMF was happy to receive a request for a Financial
Sector Assessment Program update. While noting that system-wide capital levels
appear adequate, strong cooperation between the central bank and the regulator
will be vital for success, the IMF believes. Banks’ capital, still comfortable, is thinning,
while leverage remains relatively high, notes the IMF, going on to highlight that there are systemic
risks to the euro area as a whole emanating from Luxembourg as a result of the
large volume of money market and other short-term financing provided by this
financial hub.
The IMF Directors made the following recommendations:
In light of the large size of the financial sector and its systemic importance,
a multilateral and cooperative approach to crisis preparedness was recommended
for the resolution of home-host country banking issues. A proactive pursuit
of burden-sharing arrangements, that should also cover the large money market
fund industry, is needed in the view of the IMF. The IMF stated that it could explore the need for a liquidity facility,
but current arrangements in the European Union may provide an adequate framework
for cross-border cooperation on crisis management and resolution of financial
stability issues.
The IMF called for a further strengthening of the regulatory regime, a tightening
of capital requirements, and the introduction of binding limits on leverage.
Such measures need to be phased in carefully warn the IMF, and coordinated internationally,
especially at the level of the European Union.
Luxembourg’s public finances are well positioned to weather the recession in the opinion of the IMF.
Once recovery begins, medium-term fiscal sustainability needs to be pursued
vigorously the IMF warns, as expenditures are rising and the evolution of medium-term fiscal
revenues is uncertain. The IMF recommends that the authorities should reconsider the planned return
to full indexation of wages and social benefits in 2010, as this could exacerbate
budgetary pressures, and also hamper efforts to improve competitiveness. Far-reaching
reforms of the public, pay as you go pension system remain overdue, and should
be a high priority, the IMF urges, given that substantial funding gaps bring into question
its long-term viability.
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