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Portugal Downgrade Angers EU, Roils Markets

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The downgrade of Portugal's debt to junk status late Tuesday angered the European Commission (EC), which criticized the move even as it took its toll on the markets on Wednesday. Investors reacted to the downgrade by fleeing stocks, ending a seven-day European rally, and seeking out the safe haven of gold as interest rates rose by a whole percentage point on weaker euro zone nations' debt.

Reuters reported that the move by Moody's drew criticism from the EC, which struck back during a regular news conference. EC spokesman Amadeu Altafaj was quoted saying, “The timing of Moody's decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation. This is an unfortunate episode and it raises once more the issue of the appropriateness of behavior of credit rating agencies."

Jose Manuel Barroso, president of the EC, said in the report, "Yesterday's decisions by one rating agency do not provide more clarity. They rather add another speculative element to the situation."

Portugal had enacted austerity measures that were even more stringent than those called for by lenders of its bailout package, but Moody's, slashing the country's rating by four notches, said it would likely need a second rescue. The ratings agency specifically cited the EU's management of the crisis, in particular its efforts to force private creditors to share in the cost of bailouts. In a statement, it said that such measures added to the risks investors faced, and "may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms."

European leaders had more harsh words for the agency, dismissing its evaluation of the situation. On Tuesday, German Chancellor Angela Merkel responded to Standard & Poor's statement that it would view the French plan to roll over Greek debt as a default.

Merkel was quoted saying, "It is important that the troika [EU, Internatonal Monetary Fund and European Central Bank] do not allow their ability to make judgments to be taken away. I trust above all the judgment of these three institutions."

Joerg Asmussen, Germany's deputy finance minister, criticized the mention of a second Portuguese bailout, calling it "absolutely premature." In the report he said, "There is a new government in place so I would really suggest giving the government the time to do what the new government has promised. We are confident they are willing and able to implement the first package and get back on track."

Francois Baroin, Frances new finance minister, also pushed aside the ratings downgrade. He was quoted saying, "A ratings agency's view is not going to solve the matter of tension on sovereign debt markets and the budgetary crisis."

However dismissive leaders are, investors are worried. Jay Bryson, global economist at Wells Fargo Securities, said in the report, "It goes to show that this whole crisis isn't over just yet. Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over. I would think it's bad news for Spain and Italy as well."

The gold markets certainly bore out that opinion, with prices holding above $1,515 per ounce after the precious metal saw its biggest one-day increase since early May on Tuesday in the wake of the downgrade. Gold added 1.3% Tuesday and on Wednesday in early European trading spot gold was bid at $1,515.95 per ounce against late Tuesday's price in New York of $1,515.70. U.S. August gold futures were up $3.90 at $1,516.60.