LONDON, April 25 (Reuters) - Standard & Poor's would be likely to rate a proposed new euro zone 'safe bond' in the lower half of the investment-grade category, the credit rating agency said on Tuesday.
European safe bonds (ESBies) have been proposed as a way to increase the supply of triple-A-rated euro-denominated assets and reduce systemic risks from banks' large holdings of bonds issued by their respective sovereign governments.
They centre on creating a special-purpose entity which would issue two or more tranches of securities backed by a pool of government bonds of the 19 euro zone members.
There would be no joint liability of euro zone member governments or any other explicit form of combined sovereign risk-taking, an important difference from the often discussed idea of a common government euro bond.
"Given the lack of diversification of the sovereign bond portfolio underlying ESBies, and the high correlation of euro zone sovereign default risk, we would likely rate ESBies in the lower half of the investment-grade category," S&P said.
In a note, the rating agency also warned that ESBie issuance might end up cutting the supply of top-rated euro zone debt rather than increasing it.
"We believe that ESBies will probably reduce the supply of 'AAA' rated assets ... since some 'AAA' rated sovereign bonds are likely to be repackaged into lower-rated ESBies," S&P said. (Reporting by Marc Jones; Editing by Catherine Evans)