S&P cuts Greece's rating and warns of default

Greece became the lowest-rated country in the world yesterday after Standard & Poor's cut its rating on the country's long-term debt by three notches to CCC and warned it would view a debt restructuring as a default.

The downgrade comes as Greece's Socialist government is scrambling to push a new austerity package through parliament to clinch continued funding under a year-old bailout plan despite rising public discontent.

Barely a year after Athens was granted a first €110bn aid package, the European Union, the IMF and the European Central Bank are working on a second funding deal.

Meanwhile, European banks holding Greek debt appear to be moving towards agreement on buying new bonds to replace those they hold that reach maturity. The banks' participation would be part of a second bailout for Greece worth around €120bn aimed at giving Athens more time to tackle its €340bn debt.

S&P said European politicians looked increasingly likely to impose a restructuring of Greece's debt – either via a bond swap or by extending bond maturities – as a means of having the private holders of Greek bonds share the burden.

"In our view, any such transactions would likely be on terms less favourable than the debt being refinanced, which we, in turn, would view as a de facto default," the agency said.

Several banks have come out publicly in favour of rolling over their holdings of Greek debt, including France's Credit Agricole, which owns the Greek bank Emporiki. Germany's banking association said on Saturday it backed the idea of private creditors participating in the rescue.