Ratings firm Standard & Poor's on Monday declared Greece in "selective default" after banks agreed to write off more than half of their Greek debt holdings in a second EU bailout of the country.
The rating was lowered from S&P's already junk-level "CC" grade for Greece, which has been seeking to avoid an outright default on its massive debt by negotiating a "voluntary" debt exchange with creditors.
But S&P said the terms Greece put in the tentative deal agreed last Tuesday, which amounts to a 53.5 percent writedown, forced the downgrade.
It cited Greece's move following the February 21 debt deal to amend its sovereign bond documentation with collective action clauses (CACs).
A CAC binds all bondholders of a certain series to amended payment terms in the event that a certain quorum of creditors has agreed to the terms, S&P explained.
"In our opinion, Greece's retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring."
"We believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange."
In the 237 billion euro ($320 billion) bailout deal last Tuesday, the European Union agreed to provide Greece with 130 billion in new financing while representatives of private investors, mostly banks, agreed to write off 107 billion euros worth of Greek debt via a bond swap.
The government hopes that nearly all of its private creditors will sign up to the bond swap deal, allowing Athens to impose the collective action clause to force hold-outs to accept the swap and losses as well.
The bond swap was launched on Friday, and is scheduled to be completed about March 12.
S&P said that if the exchange is consummated, "we will likely consider the selective default to be cured and raise the sovereign credit rating on Greece to the 'CCC' category, reflecting our forward-looking assessment of Greece's creditworthiness."
Eurogroup head Jean-Claude Juncker "took note of" the move by S&P late Monday, adding: "I look forward to a high participation of private creditors in the PSI (Private Sector Involvement) operation and take note of S&P's intention to upgrade the lower ratings following the settlement of the bond exchange."
UBS analyst Geoffrey Yu noted that "the ratings should be revised back to CCC after the debt exchange.
"There was no market impact as this was expected," he said.
Under the Greek legislation approved Thursday, the debt exchange becomes binding for bonds governed by Greek law "if at least two thirds by face amount of a quorum of these bonds... approve the proposed amendments."
At issue is whether the debt swap can be deemed 'voluntary' if just two-thirds of creditors sign up.
If it cannot be classed as voluntary, then creditors could invoke their credit default swaps -- insurance claims against investment losses on the bonds -- which would not only lead to heavy costs for the counterparties of the swaps, but could also possibly cause the entire Greek debt deal to unravel.
Earlier Monday Moody's Investors Service warned that despite the February 21 deal, "the risk of a default even after this distressed exchange (of bonds) is completed remains high."
"Greece's debt burden will remain large for many years, and the country is unlikely to be able to access the private market after the second assistance package runs out," warned senior analyst Sarah Carlson.
"The outcome of elections, expected in April, also constitutes a source of political and implementation risk," she added.