US default would be “devastating”, says Luxembourg treasury director

(CS) Director of the Luxembourg Treasury Georges Heinrich has warned that a US default would have “significant” effects on the Grand Duchy's economy, even though the state itself does not hold any US bonds.

As reported by the “Luxemburger Wort” on Monday, Luxembourg is one of the US's top ten money lenders, with the United States owing the Grand Duchy around 147 billion USD as of July 2013.

This places Luxembourg right behind the UK (157 billion USD) and well ahead of neighbour Germany (56 billion USD).

However, the Luxembourg cash boost comes mainly from investment funds and banks, with the Luxembourg Central Bank (BCL) holding a small amount of foreign exchange reserves. Heinrich explained to the “Wort” that the Luxembourg state has pulled out of government bonds over past years.

Should the US government become insolvent, with a Thursday deadline to reach a budget deal fast approaching, the finances of Luxembourg state would not be directly affected.

Global markets could go into tailspin

Still, the “indirect consequences” would be “significant,” not only for the Grand Duchy, said Heinrich. “For Luxembourg there is no bigger risk than for other states in the EU,” he explained, adding that the consequences would be “devastating and not foreseeable.”

A US default could send financial markets around the world into tailspin and could trigger a bigger financial crisis than that of 2008, which in turn would have a big impact on national budgets, Heinrich said.

With a few days still to go, Heinrich commented that he cannot image that the US would risk default. It is “absolutely unrealistic” that the situation escalates, he said, as the such a development would also cripple the national market.

Not least, Heinrich said that he bases his rather optimistic forecast on the situation at the stock markets, which have so far not panicked – a sign that the fiscal “nuclear bomb”, as Warren Buffett calls it, will yet be defused.

With reporting by Christoph Bumb