The Standard & Poor's rating agency downgraded Greece's credit rating to SD (Selective Default) from CC late Monday, with a prospect of upgrading to CCC after completion of the PSI bond swap process in mid-March.

In an announcement, Standard & Poor’s Ratings Service said that "it has lowered its 'CC' long-term and 'C' short-term sovereign credit ratings on the Hellenic Republic (Greece) to 'SD' (selective default)", while "our recovery rating of '4' on Greece's foreign-currency issue ratings is unchanged" and "our country transfer and convertibility (T&C) assessment for Greece, as for all other eurozone members, remains 'AAA'."

Explaining the decision, S&P said: "We lowered our sovereign credit ratings on Greece to 'SD' following the Greek government's retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on Feb. 23, 2012. The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so. 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. Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to 'SD' and our ratings on the affected debt issues to 'D'."

"As we have previously stated, we may view an issuer's unilateral change of the original terms and conditions of an obligation as a de facto restructuring and thus a default by Standard & Poor's published definition...Under our criteria, the definition of restructuring includes exchange offers featuring the issuance of new debt with less-favorable terms than those of the original issue without what we view to be adequate offsetting compensation. Such less-favorable terms could include a reduced principal amount, extended maturities, a lower coupon, a different payment currency, different legal characteristics that affect debt service, or effective subordination," S&P said.

"We do not generally view CACs (to the extent that they are included in an original issuance) as changing a government's incentive to pay its obligations in full and on time. However, we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange. Indeed, Greece launched such an exchange offer on Feb. 24, 2012," it added.

"If the exchange is consummated (which we understand is scheduled to occur on or about March 12, 2012), 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. In this context, any potential upgrade to the 'CCC' category rating would inter alia reflect our view of Greece's uncertain economic growth prospects and still large government debt, even after the debt restructuring is concluded," the announcement added.

Finance Ministry: S&P downgraded 'expected', had been pre-announced

The Greek finance ministry said in an announcement on Monday that downgrading of Greece's credit rating to SD (selective default) by Standard & Poor's ratings agency had been "expected", adding that the downgrade has no impact in the Greek banking sector and its liquidity.

"As expected, S&P has proceeded to downgrade Greece to 'SD' and the list of PSI eligible securities to 'D' following the CAC legislation onto Greek Law Bonds and the launch of the large scale voluntary PSI offer," the ministry said.

"This move was pre-announced and all its consequences have been anticipated, planned for and addressed by the relevant decision of the European Council and the Eurogroup. The downgrade has no impact in the Greek banking sector as its liquidity effect has been addressed by the Bank of Greece, and consequently by the EFSF," it added.

"The Greek sovereign will remain in 'SD' rating while the PSI offer is open, and upon completion of the PSI the sovereign is expected to be re-rated upwards," the ministry announcement concluded.

Greek bank executives see no impact from downgrade to SD

Domestic banking executives on Tuesday said a decision by the European Central Bank to temporarily suspend the use of Greek state bonds as collateral, after a same-day Standard & Poor’s announced the downgrade of the country’s sovereign debt to “selective default”, will have no impact on banks’ customers and especially borrowers.

The executives said the ECB clarified that Greek banks’ funding needs in the framework of the Eurosystem would be covered by national central banks through an Emergency Liquidity Assistance (ELA). Through this mechanism, the ECB has offered credit worth 42.9 billion euros so far, raising Greek banks’ dependence on the European Central Bank to 73.4 billion euros.

The executives stressed that Greek banks’ liquidity problems will be gradually resolved with the completion of a PSI programme, strict adherence to measures and reforms envisaged in a new lending agreement and completion of a recapitalization process of Greek banks. All these combined will lead to the restoring of Greek economy’s credibility, opening up the interbank market for Greek banks which has been frozen in the past two years since the crisis began.