Two of the world’s major credit rating agencies have both reiterated their highest scores for Luxembourg government bonds.
In seperately issued periodic reviews, Fitch Ratings and Scope Ratings affirmed the grand duchy’s AAA ratings, with a stable outlook, meaning the firms do not anticipate downgrading Luxembourg bonds within the next 12 months.
Generally speaking, a higher credit rating lowers borrowing costs on the capital markets.
“Low levels of government indebtedness and sound fiscal buffers help outweigh the economy’s small size and inherent macroeconomic volatility,” Fitch on 24 May 2024.
The ratings agency noted pressure in the real estate market. Fitch said: “Since peaking in 3Q22, residential real estate prices have been on a gradual downward trend, losing 15.7% of value by 4Q23. A prolonged decline in asset prices combined with high interest rates may pose some risk to highly-leveraged households, especially those with variable-rate mortgages (around 17% of total household loans). Household sector debt-to-income at 180% is almost twice the eurozone average, albeit mitigated by high net household wealth. The residential real estate loans constitute a fairly limited share of bank assets (15% of total loans).”
Scope the Luxembourg government’s “strong fiscal fundamentals” in its report, also issued on 24 May 2024.
It noted rising public spending. Scope said: “Expenditure growth is forecast to remain elevated, resulting from the partial extension of energy support policies, persistent pressure from public sector wages, welfare and pension payments and the roll-out of a policy package aimed at supporting the housing sector (estimated cost of around €300m over 2024-27, totalling 0.4% of 2023 GDP). At the same time, revenue growth should moderate due to the revaluation of personal income tax brackets.”
Fitch has issued AAA ratings on the grand duchy’s public debt since 2002 and Scope since 2018.
Luxembourg bonds have also been rated AAA by three other major credit rating agencies: Creditreform Rating, Moody’s Investors Service and S&P Global Ratings.