Top ratings agencies say they see the debt restructuring deal Ukraine struck with creditors this week as tantamount to a default.
Fitch lowered the rating on Ukraine's long-term public debt from "CC" to "C," citing major losses for bondholders.
"This represents a Distressed Debt Exchange...that results in material losses to bondholders and is being conducted in order to avoid default," Fitch said.
Though the deal with lenders allows Ukraine continued access to international credit markets, Fitch's downgrade is likely to increase the cost of additional borrowing.
Standard & Poor's affirmed its long-term credit rating for Ukraine at "CC," but also said "it would classify any exchange offer or similar restructuring of Ukraine's foreign currency debt as a default."
S&P said its outlook for Ukraine remained negative as it "reflects our assessment that default on Ukraine foreign currency debt is a virtual certainty, given the government's stated position and the difficult macroeconomic environment."
The deal struck between Kyiv, Franklin Templeton, and three other U.S. financial groups calls for a 20 percent "haircut" to the face value of the bonds they hold -- nearly half of $19 billion in Eurobond debt.
The agreement shaves $11.5 billion off Ukraine's debt payments, but is still short of the $15.3 billion in savings target set by the International Monetary Fund (IMF).
Restructuring was a mandatory part of a broader $40 billion global rescue package that the IMF patched together for Ukraine at the start of the year.
The difficult debt talks lasted for five months, with both the IMF and Washington putting immense pressure on bondholders to accept short-term losses in return for keeping Ukraine's pro-Western leaders from being forced to resume their reliance on Russia.
Ukraine's economy is expected to shrink nearly 10 percent this year due its war in the east and the loss of key coal mining and steel factories in pro-Russian separatist areas.
