* SNB bought 80 bln euros of "core" euro zone bonds Jan-Jul-S&P * SNB buying exacerbates diverging conditions for euro zone bonds * SNB inflow unlikely to be reversed but may diminish - S&P ZURICH, Sept 25 (Reuters) - The Swiss National Bank has bought about 80 billion euros of bonds issued by the euro zone's "core" governments over the first seven months of 2012, effectively funding half of their budget shortfall for the full year, ratings agency S&P estimated in a report on Tuesday. The purchases, the result of the SNB's intervention to cap the franc by buying euros, are part of the reason for yields for "core" eurozone bonds sinking to close to record lows, Standard & Poor's said. "Largely unnoticed, Switzerland's decision to stem the appreciation of the Swiss franc has led to a de facto recycling of funds from the eurozone periphery to its core, via the Swiss National Bank," the S&P report said. The SNB imposed a cap on the soaring franc a year ago at 1.20 per euro a year ago to fight off a flood of money fleeing the euro zone and lessen the risk of the strong currency causing deflation and a recession in Switzerland. Heavy interventions to defend that level pushed the SNB's holdings of foreign currency to 418 billion Swiss francs ($446.37 billion)at the end of August, 71 percent of annual output, although the pace of the rise has lessened as market tensions eased. The S&P estimates relate to bonds issued by the "core" euro zone governments of Germany, France, the Netherlands, Finland and Austria in the first seven months of 2012. "The SNB's eurozone bond buying during the seven months of 2012 is equivalent to about 48 percent of the combined full-year deficits we estimate for the eurozone core for the whole of 2012, up from 9 percent in 2011," S&P said. "This 'euro recycling' is exacerbating the trend of diverging market conditions for sovereign bonds in the eurozone." According to the most recent quarterly data as of the end of June, the SNB held 60 percent of its reserves in euros and 22 percent in dollars, with the bulk invested in highly rated government bonds, although the SNB gives no detailed breakdown. S&P said the SNB was unlikely to reverse the inflow into "core" euro zone bonds, as it said central banks are typically hold-to-maturity investors. "However, we also think that this inflow may diminish at some point in the future, potentially leading to upward movement of borrowing costs for some sovereigns that are currently benefit ting from peripheral capital flight," it said. SNB Chairman Thomas Jordan said on Tuesday falling sovereign bond yields supported the view that a gradual recovery in Europe was underway, but said it was too early to sound the "all clear" and the SNB was still committed to holding down the franc. ($1 = 0.9365 Swiss francs) (Reporting by Emma Thomasson)

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