Fitch Ratings affirmed Luxembourg’s top notch credit score, citing the country’s “developed, ultra-open economy, high income, strong public balance sheet and net external creditor position,” in a report issued Tuesday.

At the same time, it noted soft economic competitiveness. The credit bureau said that “the Luxembourg economy has clearly underperformed its largest neighbour, Germany, over the past year and is expected to stagnate in 2012. Fitch forecasts only a gradual recovery of the economy from 2013 onwards.”

It also warned that the Grand Duchy needs to reform its government spending and social insurance schemes. While Fitch said “Luxembourg has a track record of prudent fiscal policy,” it also observed that “in the long term, Luxembourg has to address sizeable contingent liabilities in the pension system” and “that further structural measures will be needed” to tackle the budget deficit.

The agency maintained its “stable outlook” on the Grand Duchy, meaning Fitch does not anticipate lowering the rating in the next year or so. However, in June, rival credit agency Moody’s said the Grand Duchy’s top notch rating could be lowered because of the debt crisis in Greece and Spain.

European Investment Bank

In a separate report, Fitch removed the European Investment Bank from its “rating watch negative” warning--indicating that a downgrade was possible in the foreseeable future--and affirmed the bank’s AAA rating. The EIB had been on the watch-list since December, when Fitch cited problems with Greek debt and the euro zone crisis.

Although the bank raises its own capital--to fund infrastructure projects in line with Brussel’s policy objectives--it is backed by EU member states. In its report released Tuesday, Fitch noted that the 27 shareholding countries had increased their guarantees, and re-iterated its opinion that the EIB continues to exhibit “strong governance and prudent risk management.”

Nevertheless, the ratings agency kept its “negative outlook” on the bank, citing the lowered credit scores of the EU27 governments and slow economic forecasts in Europe.

In August, Moody’s completed its annual review of the EIB and confirmed that is maintaining an AAA rating on the bank with a stable outlook.

The EIB (photo) employs about 2,000 staff and issues between 40 and 60 billion euro in loans annually.

A lower credit rating leads to higher costs when countries, banks or companies borrow in global capital markets.