Luxembourg defends its large financial sector after Cyprus deal as spotlight moves to Slovenia

Luxembourg defended the huge size of its financial sector from criticism Wednesday after Cyprus' messy bailout deal dragged other tiny economies with big banking sectors into the spotlight.

Land-locked Luxembourg is the European Union's second-smallest nation, with about 500,000 inhabitants, and has a banking sector about 20 times its annual economic output. Cyprus had a banking sector eight times its GDP.

Seeking to distance itself from Cyprus' collapse, the government said it "is concerned about recent statements and declarations" on the alleged economic risks of outsized financial sectors.

While Cyprus' banking sector was "structurally unbalanced," that of Luxembourg "acts as an important gateway for the euro area by attracting investments and thus contributing to the general competitiveness," it said.

The statement was highly unusual for Europe's wealthiest nation per capita, reflecting its fear of being bullied by the eurozone's economic heavyweights, Germany and France, which are increasingly dominating the bloc's decision-making.

Until recently, Luxembourg wielded much greater influence in the EU as its size would normally allow, because long-time Prime Minister Jean-Claude Juncker chaired the Eurogroup gatherings of the bloc's 17 finance ministers.

Luxembourg's ratio of a banking industry 20 times as big as the country's economic output doesn't even take into account the huge investments funds based there. That's "because they are only managed from Luxembourg but not physically located there," said government spokesman Guy Schuller.

But the new Eurogroup chief, Jeroen Dijsselbloem, suggested Monday that nations with outsized financial systems — such as Luxembourg or Malta — must fix their banks now because they cannot rely on other Europeans to bail them out. German Finance Minister Wolfgang Schaeuble has also voiced criticism about some nations' unbalanced economic models. Financial services account for about a quarter of Luxembourg's annual economic output.

The underlying issue is that in these small countries, the government would not be able to afford bailing out the banks, meaning a major bank insolvency could rapidly drag down public finances.

Cyprus secured a 10 billion euro ($12.9 billion) package of bailout loans on Monday. The deal also forced it to dissolve the country's second-largest bank, inflicting significant losses — possibly up to 40 percent — on all deposits larger than 100,000 euros ($129,000).

Meanwhile, the small Alpine nation of Slovenia was also on the defensive as it sought to dispel fears it might be next in line for a bailout because of its ailing banks.

"Slovenia is capable of sorting things out itself," Prime Minister Alenka Bratusek told parliament Wednesday. "There is no need to panic," she added, vowing to continue reforming the banking sector.

Slovenia's banks have been at the center of the country's financial downturn, which triggered fears the country might become the eurozone's sixth nation to require outside financial help.

The country of 2 million people has a banking sector worth 140 percent of its annual economic output, well below the eurozone average of about 350 percent. Government debt is relatively low, but markets are still nervous about the country's performance.

"Slovenia barely has access to the capital market and is likely to ask the European rescue fund ESM for help later this year," analysts at Germany's Commerzbank said in a note to clients on Wednesday.


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