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The Boston Globe

Business

Luxembourg under scrutiny for potential as next crisis

BRUSSELS — Following the chaotic bailout of Cyprus last week, European officials have started wondering aloud if Luxembourg’s banks might hold the 17-nation eurozone’s next ticking bomb, despite the tiny nation’s status as the European Union’s wealthiest country.

Mario Draghi, president of the European Central Bank, cautioned on Thursday that ‘‘the recent experience shows that countries where the banking sector is several times bigger than the economy are countries that, on average, have more vulnerabilities.’’

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The increased scrutiny has taken Luxembourg’s government by surprise and put it on the defensive. It has rejected calls to shrink its country’s main source of wealth, claiming that its banking industry is much more secure than Cyprus’s.

Cyprus was forced to seek a bailout from its eurozone partners after its once-thriving banking industry collapsed. The country couldn’t afford to bail out its financial sector, which had grown to eight times the size of its economy.

Luxembourg banks’ balance sheets are about 22 times the country’s annual economic output of $57 billion — making it Europe’s richest country per capita.

Luxembourg has relatively little debt, so it could afford to borrow to bail out the odd bank. But EU officials worry it might not be able to cope with a widespread problem.

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