Fitch cut Greece's credit rating by three notches on Friday, pushing the country deeper into junk territory, and warned that any kind of debt restructuring would amount to default.
Fitch was the second rating agency to warn that it would consider any loss imposed on bondholders as a default after Standard and Poor's said the same earlier this month.
An extension of the maturity of existing bonds would be considered by Fitch to be a default event and Greece and its obligations would be rated accordingly, the rating agency said.
If private sector 'burden sharing' is coercive, the credibility of EU/IMF policy commitments not just for Greece but also Ireland and Portugal would be severely diminished and affect financial stability across the euro area, it said.
One year into its European Union/International Monetary Fund bailout, Greece is struggling with weak revenues and a deep recession, fuelling speculation that it will have to restructure its debt to pull itself out of the fiscal mess that triggered a euro zone crisis.
The rating downgrade reflects the scale of the challenge facing Greece in implementing a radical fiscal and structural reform program necessary to secure solvency of the state and the foundations for sustained economic recovery, Fitch said in a statement.
The three-notch cut to 'B+' with a negative outlook takes Fitch's rating into highly speculative territory, broadly in line with Standard & Poor's 'B' rating and Moody's 'B1' grade. Both have also warned they could drag it deeper into junk.
Greece said the decision was influenced by intense rumors in the press at a time when Greece's program was being assessed by its lenders, and ignored new pledges.
It overlooks the additional commitments already undertaken by the Greek government to meet its 2011 fiscal targets and speed up its privatization program, the Finance Ministry said in a statement.
But Fitch said implementation and political risks have risen as further austerity measures were required to meet the 2011 budget deficit target of 7.5 percent of GDP and warned of more downgrades if the EU and the IMF do not produce a credible plan for the debt-ridden country.
In the absence of a fully funded and credible EU/IMF program, the rating would likely fall into the 'CCC' category indicating that a Greek sovereign debt default was highly likely, Fitch said.
Analysts said the move was no surprise after disappointing state budget figures for January-April, which suggest the government's efforts were not enough to meet bailout targets.
Given the poor economic conditions, more austerity is not guaranteed to be reflected in improving fiscal figures and, in our view, it will be difficult to find a sustainable solution without having to resort to a debt restructuring of some sort, said Diego Iscaro of IHS Global Insight.
Paul Rawkins, senior director at Fitch, said he did not expect Greece to be able to return to markets before May 2013, when its 110 billion euro EU/IMF aid deal expires, and that a solid rescue plan needed to be put in place beyond that date.
It should probably be long enough for Greece to get a recovery in place, the fiscal position to be looking much better and the debt to be beginning to come down, Rawkins said.
Fitch said the greater emphasis on privatization has also increased risks the EU/IMF funding may be delayed, as the 50 billion euros in asset sales targeted will be hard to meet.
Despite all this, Fitch said it believed the government remained committed to its fiscal program and some assets would be sold by the end of the year.
The B+ rating reflects the belief the EU and IMF will come up with fresh funds for Greece and that its bonds will not be subject to soft restructuring or re-profiling.
Standard and Poor's, which downgraded Greece's credit rating further into junk territory to B on May 9, had also warned that any extension of debt bond maturities held by private investors would be viewed as a selective default.
Such private sector burden sharing would likely constitute a distressed exchange according to our criteria, for which we assign a rating of 'SD' for selective default, the agency said.
The chairman of the 17-country Eurogroup Jean-Claude Juncker acknowledged on Tuesday Greece may have to move toward a soft restructuring of its debt, although the European Central Bank remains strongly opposed to such a move.