It said Greece would be designated as having technically defaulted after the bond exchange is formalized, but the new bonds would be give and new rating.

All three big ratings agencies -- Fitch, Moody's and Standard & Poor's -- downgraded Greece in July when an initial debt swap plan was unveiled and have warned that losses for private creditors would trigger a temporary default.

As expected, Fitch said it was downgrading Greece to "C" from "CCC," and would follow up with further downgrade to a "restricted default" when the bond swap is completed.

It will then reassess the country's ratings when new bonds are issued as part of the debt exchange.

"It would come out to a low, speculative grade rating," Fitch analyst Paul Rawkins told Reuters on the ratings after the reassessment, noting that rating would factor in the country's economic prospects and new debt profile.

He added that the current process of downgrades was largely procedural, following the path laid out by the agency in June. Ratings, which give an estimate of the capacity of a creditor to repay its debt, usually serve as a guide to investors.

Euro zone finance ministers agreed a 130-billion euro rescue plan for Greece on Tuesday to avert a messy default, including a bond swap to shave 100 billion euros off Greece's debt burden.

Bondholders will take losses of 53.5 percent on the nominal value of their Greek bonds as part of the swap, with actual losses put at around 74 percent in real terms.

The European Central Bank fas agreed to a complex plan to ensure Greek bonds can still be used as collateral in its lending operations whilst in the process of being swapped.

Greece will take a loan from the European Financial Stability Facility (EFSF) which will come in the form of EFSF bonds. Those bonds will passed to ECB and put into a special account incase there are any losses on collateral during the short window of the bond swap.

(Reporting by Deepa Babington and Harry Papachristou. Editing by Jeremy Gaunt)

• A Permanent Economic Emergency