Hands off our banking sector, Luxembourg tells euro zone

BRUSSELS, March 27 Wed Mar 27, 2013 11:53am GMT

BRUSSELS, March 27 (Reuters) - Luxembourg, home to several European Union institutions, has rebuffed calls from some of its partners to reduce the size of its powerful banking sector in response to the crisis in Cyprus.

Luxembourg has a banking sector more than 20 times the size of its economy. The industry has helped make the small country the richest in the bloc in terms of economic output per person.

Its foreign minister Jean Asselborn has already accused Germany of "striving for hegemony" in the euro zone by telling Cyprus what business model it should pursue.

On Wednesday Luxembourg joined the tiny Mediterranean country of Malta in rejecting comparisons between its economy and Cyprus, whose heavy reliance on banking and exposure to the Greek sovereign debt crisis forced it into a 10 billion euro ($13 billion) rescue this month.

Leading politicians in Germany and Brussels and the head of the euro zone's finance ministers this week told such countries their banking sectors had to shrink.

But Luxembourg, a country of just half a million people, said it was not Cyprus, and emphasised the importance of sound public finances.

"Luxembourg is concerned about recent statements and declarations that were made since the crisis in Cyprus," the government said in a statement.

"The proportionality of a financial sector cannot be determined by relating the size of a financial sector to the gross domestic product of a country."

Luxembourg is host to about 140 subsidiaries of banks and insurers from more than 20 countries.

The government of Prime Minister Jean-Claude Juncker, who stepped down as chairman of the Eurogroup of finance ministers at the start of this year, said it viewed the Cypriot rescue as "an exceptional measure".

In return for the bailout money, Cyprus agreed on Sunday to shut down its second largest bank and reduce its banking sector to the EU average of about 3-1/2 times gross domestic product by 2018.

Luxembourg said the principle of a single European market was essential, including in financial services, and opposed the kind of capital controls that Cyprus was finalising on Wednesday to avert a run on the banks by depositors.

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