UPDATE 1-S&P says new EU fund is negative "game changer"

* ESM hurts creditworthiness of debt-choked countries – S&P

* ESM also likely to affect Ireland rating

* Markets exaggerate Portugal’s default risk

(Adds quotes, details)

ATHENS, March 29 (Reuters) – The euro zone’s future
financial rescue fund, the European Stability Mechanism, is a
negative “game changer” for debt-ridden countries and private
holders of their debt, Standard & Poor’s credit rating agency
said on Tuesday.

Standard & Poor’s downgraded Greece and Portugal on Tuesday,
saying a deal at an EU summit last week over a new bailout fund
could hurt bond holders because it will give preferred creditor
status to the official rescue mechanism. [ID:nLDE72S1LY]

“Our view is that this really is a game changer,” said S&P
analyst Frank Gill. “That clearly has an impact on the
creditworthiness of these countries which are the most likely
clients of the ESM in the future.”

European leaders agreed a new package of anti-crisis
measures at a two-day summit last week, sealing a deal on the
outline of the ESM, a new, permanent safety net that will become
operational in mid-2013 and have preferred creditor status.

Countries that resort to the mechanism may be forced to
restructure private debt before getting support.

“We do think it is clearly negative for holders of
commercial debt, that is our view, that it will weigh on
countries’ capacity to serve their commercial debt,” Gill told a
conference call.

Despite cutting Portugal’s debt to just one notch above junk
on Tuesday, S&P said it still considered the country as highly
creditworthy. “The market exaggerates the default risk for a
country such as Portugal,” Gill said.

Ireland’s rating is also likely to be affected by the
European Stability Mechanism, Gill said.

“We have Ireland on credit watch negative,” he added. “We
are also very much focused on the outcome of the stress tests
that the central bank is doing… that will impact our next
rating action.”

(Reporting by Ingrid Melander and Harry Papachristou;
Additional reporting by Renee Maltezou, Editing by Ron Askew)

UPDATE 1-S&P says new EU fund is negative "game changer"