S&P said that once the debt exchange is concluded, it would likely raise Greece's sovereign credit rating to the speculative 'CCC' category.

"We lowered our sovereign credit ratings on Greece to 'SD' following the Greek government's retroactive insertion of collective action clauses (CACs)," the U.S. ratings agency said.

It said Greece's retroactive insertion of CACs -- which enforce losses on investors who do not voluntarily sign up to the offer -- changed the original terms of the affected debt and made the exchange a "distressed debt restructuring".

Greece formally launched the bond swap on Friday. Under the deal, bondholders will take losses of 53.5 percent on the nominal value of their Greek holdings, with actual losses put at around 74 percent.

S&P said if enough bondholders did not accept the bond swap offer, Greece would face an imminent outright payment default.

The agency defines its "selective default" status as one where the obligor has selectively defaulted on a specific issue or class of obligations but will continue to meet payment obligations on other issues or classes in a timely manner.

Athens said the downgrade was expected and would not hurt its banks since the central bank had already made provisions for it.

"This rating does not have any impact on the Greek banking system since any likely effect on liquidity has already been dealt with by the Bank of Greece," the Greek finance ministry said in a statement.

S&P's move follows that of Fitch, which last week cut Greece's long-term ratings to its lowest rating above a default as a result of the bond exchange plan.

S&P also said that any upgrade to the 'CCC' category rating would reflect its view of Greece's uncertain economic growth prospects and still large public debt, even after the restructuring is concluded.

(Reporting by George Georgiopoulos; Editing by Diane Craft)

• A Permanent Economic Emergency