Luxembourg's 'AAA/A-1+' Ratings Affirmed; Off Watch Neg, Outlook Negative

We are affirming the 'AAA' long-term and 'A-1+' short-term sovereign 
credit ratings on Luxembourg. 
The outlook on the long-term rating is negative.

LONDON (Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings Services 
today affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit 
ratings on the Grand Duchy of Luxembourg. At the same time, we removed the 
long-term rating on Luxembourg from CreditWatch with negative implications, 
where it was placed on Dec. 5, 2011. The outlook on the long-term rating is 
negative. 

Our transfer and convertibility (T&C) assessment for Luxembourg, as for all 
European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting 
our view that the likelihood of the European Central Bank restricting 
nonsovereign access to foreign currency needed for debt service is extremely 
low. This reflects the full and open access to foreign currency that holders 
of euro currently enjoy and which we expect to remain the case in the 
foreseeable future.

The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements 
from policymakers lead us to believe that the agreement reached has not 
produced a breakthrough of sufficient size and scope to fully address the 
eurozone's financial problems. In our opinion, the political agreement does 
not supply sufficient additional resources or operational flexibility to 
bolster European rescue operations, or extend enough support for those 
eurozone sovereigns subjected to heightened market pressures. 

We also believe that the agreement is predicated on only a partial recognition 
of the source of the crisis: that the current financial turmoil stems 
primarily from fiscal profligacy at the periphery of the eurozone. In our 
view, however, the financial problems facing the eurozone are as much a 
consequence of rising external imbalances and divergences in competitiveness 
between the eurozone's core and the so-called "periphery." As such, we believe 
that a reform process based on a pillar of fiscal austerity alone risks 
becoming self-defeating, as domestic demand falls in line with consumers' 
rising concerns about job security and disposable incomes, eroding national 
tax revenues. 

Accordingly, in line with our published sovereign criteria, we have adjusted 
downward the political score we assign to the Grand Duchy of Luxembourg (see "
Sovereign Government Rating Methodology And Assumptions," published on June 
30, 2011). This is a reflection of our view that the effectiveness, stability, 
and predictability of European policymaking and political institutions (with 
which Luxembourg is closely integrated) have not been as strong as we believe 
are called for by the severity of a broadening and deepening financial crisis 
in the eurozone.

In our baseline scenario, we expect much lower GDP growth of 0.2% in 2012 and, 
given the Luxembourg economy's dependence on the large financial sector, we 
believe that growth prospects for the longer term will also be subdued. We 
anticipate that this could put further pressure on public finances. 

However, the affirmation reflects our opinion that Luxembourg's underlying 
strengths--its stable political environment, demonstrated control over public 
finances, and very strong government balance sheet (net general government 
assets are estimated is nearly 20% of GDP in 2012)--will be sufficient to 
absorb external stress emanating from the current eurozone crisis at the 
current rating level. In our opinion, Luxembourg has the fiscal capacity and 
political backing to implement measures that would help mitigate the impact of 
external shocks.

The negative outlook indicates that we believe that there is at least a 
one-in-three chance that we will lower the rating in 2012 or 2013. 

We may lower the rating if we consider that Luxembourg 
financial-services-based business model could be exposed to higher risks, and 
a significant deterioration in overall operating volumes in a more-difficult 
capital market environment, which would reduce longer-term growth prospects.

We believe that the authorities will support systemically important 
institutions, including foreign-owned ones when they have domestic activities, 
as they have done in the past. Any need to inject capital into the financial 
sector could reduce the stock of government assets and lead us to lower the 
fiscal score. The financial health of other foreign-owned financial 
institutions is also important to Luxembourg's business model and longer-term 
growth potential, even though we believe that they would be supported by their 
parents in case of stress.

We could revise our outlook to stable if we see the risks to Luxembourg's 
business model abate. In our opinion, these risks include changing legal 
conditions around advantageous tax regimes or deterioration in the 
profitability, performance, or activity level of the financial services 
sector.


RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit 
Portal. 

Sovereign Government Rating Methodology And Assumptions, June 30, 2011 
Criteria For Determining Transfer And Convertibility Assessments, May 18, 
2009
Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With 
Negative Implications, Dec. 5, 2011
Trade Imbalances In The Eurozone Distort Growth For Both Creditors And 
Debtors, Says Report, Dec. 1, 2011
Who Will Solve The Debt Crisis?, Nov. 10, 2011 

TELECONFERENCE INFORMATION
Standard & Poor's will hold a teleconference on Saturday Jan. 14, 2012 at 3:00 
PM UK time. The teleconference can be accessed live or via replay and by phone 
or audio internet streaming

The call will begin promptly at 3:00 p.m. 

TELECONFERENCE DETAILS
Passcode: 2705831 
For security reasons, the passcode will be required to join the call. 

DIAL IN NUMBERS: 
Country        Toll Numbers            Freephone/Toll Free Number
AUSTRIA        43-1-92-80-003          0800-677-861 
BELGIUM        32-1-150-0312           0800-4-9471 
DENMARK        45-7014-0239            8088-2100 
ESTONIA                                800-011-1121       
FINLAND        106-33-149              0800-1-12771 
FRANCE         33-1-70-75-25-35        080-563-9909 
GERMANY        49-69-2222-3198         0800-101-6627 
GREECE         30-80-1-100-0674        00800-12-6609 
IRELAND        353-1-247-5274          1800-992-870 
ITALY          39-02-3601-0953         800-985-849 
LUXEMBOURG     352-27-000-1351         8002-9058 
NETHERLANDS    31-20-718-8530          0800-023-4392 
PORTUGAL                               8008-12439 
SLOVAK REPUBLIC 421-2-322-422-16           
SPAIN          34-91-414-40-78         800-098-194 
UNITED KINGDOM 44-20-7950-6551         0800-279-3590 
USA            1-210-795-1143          866-297-1588 

TELECONFERENCE REPLAY INFORMATION: 
Call notes: This call is to be recorded for Instant Replay purposes
UK TOLL #: +44-20-7108-6279
UK TOLL FREE #: 0800-376-9027

The instant replay will start at: Jan. 14, 2012 5:30pm UKT
The instant replay will end at: Feb-14-2012 11:59pm UKT

Passcode for replay: 7498
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Conference number: 1297498
Passcode: 2705831 

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