Standard and Poor's on Wednesday relegated Greek government bonds to the deeper end of junk status, cutting the debt-crippled country's credit rating by two notches to CC and saying a new downgrade is likely.
The international ratings agency said a proposed restructuring of Greece's debt load under a second international bailout deal worth euro109 billion ($157 billion) would amount to a selective default _ a rating that, while humiliating, is expected to have limited practical consequences. Both of the other major ratings agencies have said much the same.
A Standard and Poor's statement also said the possibility of a future Greek default is likely to remain high.
Under the debt relief deal struck in Brussels last week, banks and other private investors will contribute some euro50 billion ($72 billion) to the rescue package until 2014 by voluntarily swapping Greek bonds that they hold for new ones with lower interest rates or slightly lower face value
"Standard and Poor's has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology," the ratings agency said. "We view the proposed restructuring as a 'distressed exchange' because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors."
On Monday, Moody's ratings agency downgraded Greece by three notches and warned that it is almost inevitable the country will be considered to be in default following the new bailout package.
There was no immediate comment from Athens. Responding to the Moody's downgrade, government spokesman Elias Mossialos had said it was of "no practical value," arguing that domestic lenders can now count on secure credit lines.
He also suggested that Greece should cancel its subscriptions to international ratings agencies.
Greece closely flirted with insolvency for more than a year, after profligate government overspending and a massive public debt drew an avalanche of credit downgrades, while the country's borrowing rates were driven so high that access to bond markets became impossible.
But the bailouts have staved off a potentially catastrophic bankruptcy that could have stopped payment of pensions and public sector salaries. While a selective default rating will be a humbling first for a country using the euro, its immediate practical consequences for Greece should be limited.
For weeks, the overriding fear was that, because of the bad rating, already struggling Greek banks would be frozen out of the European Central Bank's emergency liquidity operations.
However, last week eurozone leaders found a way around that threat by promising to temporarily deposit euro35 billion ($50 billion) with the ECB to boost the creditworthiness of defaulted bonds used as collateral by Greek banks, until the default rating has been lifted.
Crucially for Greece and Europe as a whole, the International Swaps and Derivatives Association, a trade association, said the new rescue deal is not expected to trigger payment of bond insurance because private sector involvement is voluntary.
Standard and Poor's said it understands that Greece's debt restructuring will start in September 2011 at the earliest.
"Upon the announcement of the implementation of the restructuring, a downgrade to 'SD' (selective default) would likely occur," the agency said. "If the exchange involves multiple separate transactions over several weeks or months, we would assign our 'SD' sovereign credit rating to Greece on completion of the first repurchase."
"Subsequently, all other things being equal, we would likely raise our sovereign credit rating as early as a few days after completion of the first repurchase."
Despite strong opposition from trade unions and even some of its own lawmakers, Greece's Socialist government has implemented harsh austerity measures for more than a year, cutting pensions and public sector salaries while increasing taxes and retirement ages.
Future measures include an ambitious euro50 billion privatization program by 2015.
Earlier Wednesday, Greece appointed BNP Paribas, Deutsche Bank and HSBC to act as dealer-managers for the voluntary private sector participation scheme.
Cleary Gottlieb Steen and Hamilton LLP was also appointed international legal adviser, while Lazard Freres will be the financial adviser.
International banking representatives will discuss the scheme Thursday during talks in Athens with finance ministry officials.