Standard & Poor's warned it could cut Greece's BB-plus credit rating if it becomes clear that the proposed European Stability Mechanism will favor public creditors to the detriment of private bond holders.

Greece, as a potential recipient of European Stability Mechanism (ESM) funding, could have its ratings negatively affected by the new rules, S&P said, echoing a warning it issued earlier this week regarding Portugal's ratings.

"We believe that assigning 'preferred creditor' status to future official lending via the ESM could be detrimental to the ability of non-official holders of sovereign debt to be repaid," S&P said in a statement.
S&P said it will await details of the plan to make its decision, which shouldn't take longer than three months.

As part of the new mechanism for resolving debt crisis, euro zone finance ministers agreed last weekend that sovereign bonds issued as of 2013 would carry collective action clauses — an instrument allowing a country to restructure its debt with the agreement of a certain percentage of creditors.

The mechanism would also allow shareholders of the ESM to trigger a debt restructuring on a case-by-case basis. It envisions that any post-2013 lending by the ESM will benefit from "preferred creditor status."

"We believe that such subordination could hurt the prospects of timely and full repayment of non-ESM sovereign debt and would likely lower recoveries on such non-ESM sovereign debt," S&P said.