The European Central Bank's decision to exempt itself from taking losses on its Greek bonds gives its senior status in the bond market and may push up borrowing costs of other debt-strained euro zone countries, Standard & Poor's said on Friday.
The ECB and the 17 euro zone central banks made cosmetic changes to the 62 billion euros (52 billion pounds) worth of bonds they own this week to avoid being pulled into Greece's debt reduction deal, which will see private investors lose well over half their money.
S&P, which carried out a mass downgrade of nine euro zone states last month, said the ECB's move was another blow for the bloc's weaker countries, changing the ECB's status at least in this instance from implicit super-senior creditor to an explicit one.
We believe that this development (seniority of ECB) could further weaken the prospects of peripheral euro zone sovereigns currently receiving official funding to regain the ability to access the capital markets and could raise borrowing rates of those sovereigns still accessing the primary markets, it said in a statement.
S&P downgraded several euro zone countries after it was established in March last year that the permanent European rescue fund ESM would have preferred status over other creditors.
While it opted not to follow suit this time around, it said it put further pressure on weaker parts of the euro zone.
The prospect of effective subordination may lead investors to expect higher coupons in order to compensate for this additional risk, which in turn may have negative consequences for a sovereign's debt sustainability and therefore may increase the likelihood of a sovereign default.
S&P's criticism appears to be backed up by the increase this week in the level of reward investors demand to hold Portuguese debt. (for graphics click http://r.reuters.com/hyb65p http://link.reuters.com/mac36s)
In contrast, however, Italian and Spanish yields how shown no reaction, although both face a tough couple of months of issuance which is likely to test the recent improvement in sentiment towards them.
Other rating agencies have also raised concerns about the ECB's Greek bond move.
Fitch's Greek analyst Paul Rawkins told Reuters this week that there would be an inevitable read-across from the decision, and although the market expected the ECB's move, it was still too early to gauge the true impact.
S&P also warned that the decision not to take losses on its Greek bonds could also blunt the potency of the ECB's emergency bond buying programme.
That is unlikely to concern the ECB at present. The bank has wound down its purchases over the last month and a half and in a symbolic move bought nothing at all last week.
(Reporting By Eva Kuehnen and Marc Jones; Editing by Chizu Nomiyama)