Standard and Poor's starring role in the latest chapter of the European debt crisis has rekindled criticism on Wall Street about the role of rating agencies in credit markets.

S&P downgraded Greek debt to junk status on Tuesday and also cut ratings for Portugal and Spain this week in a series of swift moves that pressured the euro and drew ire from European officials.

Even some Wall Street analysts were puzzled over the timing of S&P's moves.

I don't know what happened -- the timing of their announcements I thought was peculiar, said Ward McCarthy, chief financial economist at Jefferies & Co in New York.

Why this week and not last week or even months ago? I don't know that there are any particular events that warranted a downgrade.

The agencies are no strangers to controversy.

Investors and lawmakers have claimed they contributed to the 2008-09 financial crisis by inflating ratings on risky mortgage-backed bonds before downgrading them as the underlying subprime loans began to default in large numbers.

This time, top European officials have chided S&P for acting too hastily, saying the EU and IMF had already agreed to an emergency aid plan for Greece and were in negotiations with Athens about its size and conditions.

We're seeing ... these questions again of the role of ratings agencies and the reliance on them, said Jacques Cailloux, chief European economist at RBS Securities in London.

A SPIRAL FOR EUROPE

Investors have been selling Greek assets for months, a trend that began when the country revealed last year that its 2009 budget deficit was twice as high as markets thought.

Even before S&P acted, yields on Greek two-year bonds had climbed into the high teens -- representing a higher cost of borrowing than for many emerging markets. After the country's downgrade to junk status, the two-year yields briefly rose as high as 25 percent from around 12 percent on Monday.

Being labeled junk also raised the risk of a new and more severe problem: that the European Central Bank may soon not be able to accept Greek government bonds as collateral.

The ECB will probably have to revise its collateral policy, Cailloux said. Otherwise, if Greek debt were to be rendered unacceptable, you have a full-blown crisis that wouldn't have happened without the downgrades.

In a BBC interview on Thursday, David Beers, S&P's global head of sovereign risk, defended the agency's decision.

We've actually been looking very closely at the economic as well as fiscal divergences in the eurozone and taking ratings actions based on that analysis going back six years now, Beers said. So this has been a problem that the markets have been ignoring for a very long time.

CDS ALTERNATIVE?

Some analysts consider credit default swaps a more accurate measure of credit-worthiness for a market weary of the ratings agencies.

At the height of Greek default fears, a five-year Greek CDS

-- which insures a Greek bondholder against default -- cost nearly seven times that of comparable insurance against a default by Brazil.

The CDS market is in essence an expression of credit risk, and is a better expression of market sentiment than ratings are, said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. And it's clear the ratings agencies are late to the game.

But relying on CDS has its own pitfalls.

The market can be manipulated, and it may be too volatile to be used as a stable measure of credit-worthiness. The changes in CDS costs have been swift -- they move at the pace of other expressions of market sentiment, such as changes in bond yields -- and even more dramatic in scale, in some cases, than the ratings downgrades.

But Gilmore sees the larger CDS moves as an advantage.

If we look at what happened in CDS and then what was done on the ratings front, I would argue that the ratings agencies are being very conservative, he said.

One piece of evidence that suggests financial markets may already put more weight on CDS spreads than on credit ratings was the muted reaction to S&P's downgrade of Spain on Wednesday. The gap between yields on 10-year Spanish government bonds and comparable German debt widened only slightly after the move.

The market has in a lot of cases already discounted the ratings agencies' movements, Cailloux said.

(Editing by Dan Grebler)

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