Greece is expected to announce a bond swap deal with private sector creditors which will see at least half the value of their investments in its debt written off.
Such a deal is likely to tip the country into default, although that could mean several different things.
Greece's current ratings
The three big credit rating agencies - Fitch, Moody's and Standard & Poor's - downgraded Greece in July after the debt swap plan was unveiled, assigning it "highly speculative" status and warning that losses for private creditors would imply a default. Fitch rates Greece CCC, S&P rates it CC and Moody's Ca.
Selective or outright default?
Fitch and S&P make a distinction between a selective or restricted default, where a borrower stops making interest or principal payments on some debts, and an outright inability or refusal to repay creditors.
Market players often make similar distinctions, referring to "orderly and disorderly", "soft and hard" or "managed and messy" defaults.Both rating agencies have said a debt exchange under which creditors take losses, whether voluntary or otherwise, would be a selective or restricted default.
S&P said in July it would revise Greece's sovereign rating to "selective default" when any debt restructuring is implemented, with the affected bonds being cut to D, its lowest rating, denoting a default.
Fitch's lead analyst for Greece, Paul Rawkins, said on Wednesday that Greece would be assigned its "restricted default" rating when the bond exchange period closes.
Moody's does not make a similar distinction but its lowest rating of C implies a default with little prospect for recovery of principal or interest.
What happenes afterwards?
S&P and Moody's each said in July that once a restructuring is completed they will reassess Greece's creditworthiness in light of its reduced debt burden, which is likely to mean its ratings are upgraded. S&P said it expected to assign "a low speculative-grade rating" to Greece, reflecting its still-high debt and uncertain growth prospects.
New bonds issued under the debt swap will also be rated, possibly - since some will be collateralised - at a higher level than unsecured Greek government bonds.
Fitch's Rawkins said Greece's restricted default rating would be maintained "for a short period" before it was reassessed, taking into account changes to the country's debt profile.
An outright default would be seen as a sign politicians had lost control of the single currency, and markets would immediately take aim at other weak countries such as Italy, Spain and Portugal.
Will there be a credit event?
The International Swaps and Derivatives Association (ISDA), has the final say on whether a "credit event" has occurred, triggering the payment of default insurance taken out on Greek bonds via the credit default swap market.
According to the latest data from DTCC , outstanding credit default swaps on Greek debt total $70.8 billion gross and $3.2 billion net. Forced losses for investors would almost certainly be considered a credit event, even as part of an "orderly" default.
Greek Prime Minister Lucas Papademos told the New York Times this week he will consider legislation forcing creditors to take losses if no agreement can be reached.
An outright default, where Greece does not meet interest payments or repay principal, would prompt ISDA to declare a credit event as grace periods expire.
Recent comments
"Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations I cannot say," Moritz Kraemer, the head of S&P's European sovereign ratings unit, told Bloomberg Television on Monday.
"There is a lot of brinksmanship (going) on and a disorderly default will have ramifications on other countries but I believe policymakers will want to avoid that ... The game is still on."
"It is going to happen. Greece is insolvent so it will default," Edward Parker, Managing Director for Fitch's Sovereign and Supranational Group in Europe, the Middle East and Africa, told Reuters on Tuesday. "So in that sense it shouldn't be a surprise to anyone.
"We have said for a long time that we don't think this (private sector involvement) is the way to go, and we would treat it as a default," Parker said. "It clearly is a default, however they try to spin it."
"It would be a default regardless of the size of the NPV (net present value) loss," Fitch's lead analyst for Greece, Paul Rawkins, said on Wednesday.
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