Greece's downgrade by Fitch Ratings is the first in a series ofratings cuts that the nation can expect after it negotiated thebiggest sovereign debt restructuring in history.

Fitch lowered Greece's credit grade by two levels to C from CCC,saying a default is “highly likely in the near term,” and that itwill cut the nation again to “Restricted Default” once a bondexchange is completed. Standard & Poor's said in July itexpected to downgrade Greece to “Selective Default” after therestructuring agreement, while Moody's Investors Service has saidit will cut the nation to its lowest rating.

Greece sealed a 130 billion-euro ($170 billion) bailout packageby agreeing yesterday to austerity measures while reducing its bondprincipal by 53.5 percent as investors swap into new securitieswith longer maturities and lower coupons. Fitch and S&P haveboth said they expect to later raise Greece's ratings once the dealhas been completed.

“It's almost a paradoxical exercise,” said Richard McGuire, astrategist at Rabobank International in London. “They downgrade youbecause you're not paying your bonds and then upgrade you becausethe bonds don't exist, so you're not in default.”

Fallout from a downgrade to default won't affect credit-defaultswaps insuring Greece's debt, according to the rules of theInternational Swaps & Derivatives Association. A credit eventthat would trigger the swaps is decided by ISDA's DeterminationsCommittee, which meets at the request of its members, includingtraders and investors.

A total of 4,263 contracts insuring a net $3.2 billion of Greekdebt were outstanding as of Feb. 17, according to the DepositoryTrust & Clearing Corp., which runs a central registry for themarket. ISDA has indicated that a voluntary exchange doesn't meetthe conditions to declare an event of default.

Credit-default swaps pay the buyer face value in exchange forthe underlying securities or the cash equivalent should a borrowerfail to adhere to its debt agreements.

Once the debt exchange is completed, Greece will be moved out ofthe RD category and “re-rated at a level consistent with theagency's assessment of its post-default structure and creditprofile,” New York-based Fitch said in today's statement.

In emerging markets, the process has typically taken “a coupleof months,” though Jamaica spent one day rated RD in 2010,according to London-based Paul Rawkins, Fitch's primary analyst onGreece. “With Greece, the onus will be on completing the process asquickly as possible.”

S&P, Moody's

S&P rates Greece at CC, two steps up from a default rating.Moody's said in December it will cut the country's Ca grade by onelevel to C if the debt exchange means the so-callednet-present-value loss on its bonds is greater than 65 percent.

Moody's is assessing Greece's bailout and will comment in duecourse, according to a spokeswoman for the ratings firm whodeclined to be identified.

Greek Finance Minister Evangelos Venizelos repeated today that aformal invitation for the bond exchange will be made by Feb. 24.Real losses from the swap may be more than 70 percent, said AndreasKoutras, an analyst at ITC Markets in London.

Greece needed to get its second bailout from Europeangovernments or risk a default that could endanger the 13-year-oldmonetary union by sending Greece crashing out of the euro. Thatmove isn't foreseen in the treaties and might call into questionthe continued membership of other stressed nations such as Portugaland Ireland.

“We're treating Greece as a unique experience in a euro-zonecontext,” said Fitch's Rawkins. “We can highlight differences withother countries including that the programs are working in Irelandand Portugal and in Greece they weren't. Current account imbalancesare coming down in Ireland and Portugal and in Greece theyaren't.”

The country's debt was forecast to balloon to almost double thesize of its shrinking economy this year without the write-off, theEuropean Commission said in November.

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