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.