One of the world’s major credit rating agencies has confirmed its top-notch score for Luxembourg government bonds. 

In its latest review, Morningstar DBRS confirmed the grand duchy’s AAA rating, the agency’s highest, with a “stable” outlook, meaning it does not anticipate downgrading Luxembourg bonds within the next 12 months. It has issued AAA scores on the grand duchy’s debt since 2016.

 “Although the government’s debt stock is likely to increase moderately over the next years, Luxembourg’s debt-to-GDP ratio is projected to remain among the lowest in Europe,” the firm in a research note on 10 May 2024.

The grand duchy’s economy is heavily dependent on the financial services and business services sectors, which together represented 36% of total nominal gross value added in 2023, the agency observed.

“While ongoing changes in global corporate taxation could affect the operations of multinational companies, Morningstar DBRS takes the view that the overall attractiveness of Luxembourg as a financial hub is likely to remain large due to a highly skilled workforce, a strong legal and regulatory environment, and political stability.”

However, Luxembourg banks could come under some pressure from the weak property market. “Pockets of vulnerability for asset quality might arise from a comparatively large decline in domestic housing prices,” which was an average of 18.4% for existing houses between Q3 2022 and Q4 2023. “Furthermore, the recent increase in interest rates might strain the repayment capacity of some households.”

Luxembourg bonds have also been rated AAA by five other major credit rating agencies: Creditreform Rating, Fitch Ratings, Scope Ratings, Moody's Investors Service and S&P Global Ratings.

Generally speaking, a higher credit rating lowers borrowing costs on the capital markets.