Preferential treatment the European Central Bank enjoyed during Greece's recent debt restructuring will reduce the effectiveness of any new bond purchases unless the bank makes it clear that it will take losses in future, rating agency Fitch said today.

Whereas the majority of Greek bond holders took heavy losses when Greece defaulted earlier in the year, the ECB made last minute legal changes to the €50 billion worth of bonds it had bought as part of an emergency programme, to avoid taking the hit.

"The revealed (bond market) seniority of the ECB will reduce the effectiveness of renewed bond purchases unless it is able to credibly address the 'seniority issue'," Fitch said in a new report.

"Even if the ECB is able to credibly pre-commit not to exercise its preferred creditor status in the event of default, its bond purchases are likely to be associated with EFSF/ESM bond purchases/lending, implying some subordination of private creditors."

Despite its concerns, Fitch said that bond purchases by the ECB and the EFSF/ESM bailout funds would help in the fight against the crisis.

The ECB is expected to lay out a new bond buying-led plan at its September 6th meeting. Optimism over it have driven a strong rally in global stock markets over recent weeks and helped investors regain some appetite for strained euro zone bonds.

"Sovereign bond purchases by the ECB in the secondary market and primary (or secondary) market purchases by the EFSF ('AAA') or ESM would likely be credit positive and ease downward pressure on sovereign ratings in the eurozone," Fitch said.

"The willingness and ability to conduct bond purchases in primary and secondary markets can allow the sovereign to retain affordable access to market funding, reduce the risk of self-fulfilling liquidity crises and by lowering sovereign credit spreads, ease domestic financial and credit conditions."

In a separate report the firm added that a request by Spain for the euro zone's bailout fund to buy its debt would not trigger another downgrade of its sovereign debt. It recently cut Spain to BBB and left the door open to further downgrades.

"Sovereign bond purchases by the EFSF/ESM, especially if supported by secondary market purchases by the ECB, would significantly reduce the risk of a self-fulfilling liquidity crisis," Fitch said.

Reuters