Brussels and Lisbon lambaste Moody's for Portugal junk rating

The European Commission on Wednesday bristled at Moody's Investors Service for spooking the financial markets with its "questionable" decision to slash Portugal's credit rating to junk status on the argument it may have to follow Greece in seeking a second bailout.

"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," European Commission spokesman Amadeu Altafaj told a news conference in Brussels. "This is an unfortunate episode and it raises once more the issue of the appropriateness of the behavior of credit rating agencies," he added.

European Commission President José Manuel Durão Barroso also criticized Moody's move, which caused Portuguese bond yields to jump by over 100 basis points. The spread between the yield on the benchmark Portuguese 10-year government and the German equivalent broke through the 1,000-basis-point mark for the first time since the euro came into being.

The impact sparked contagion in other euro-zone peripheral sovereign debt markets such as Spain and Italy's. Spain's risk premium jumped 17 basis points from Tuesday to 264 basis points, its highest level since April when the idea of Greece having to restructure its debt was first broached. The European stock markets were also hit led by the Lisbon Euronext PSI-20, which closed down 3.03 percent, and the Spanish blue-chip Ibex 35, which shed 1.22 percent. Banks suffered the brunt of the sell-off.

Barroso told reporters in Strasbourg that Moody's move added "another speculative element to the situation."

Barroso said European lawmakers should consider invoking "civil liability" in cases of wrong calls by ratings agencies and lamented the lack of a European agency.

"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of specific issues of Europe," Barroso said.

Spanish Deputy Prime Minister Alfredo Pérez Rubalcaba trusted in the markets to act "sensibly" with regard to Spain. "The economic situation in Spain is radically different," he said. "We are not Portugal, we are not Greece, we are not Ireland. We have taken care to carry out what is needed in order not to be so."

Portuguese Prime Minister Pedro Passos Coelho described the downgrade as a "blow to the stomach."

Moody's late Tuesday cut its sovereign rating for Portugal by four notches from Baa1 to Ba2, two levels below investment grade. The outlook on the new rating remains negative, implying further downgrades. Currently Standard & Poor's and Fitch are maintaining Portugal at just above junk status.

Moody's questioned the Portuguese government's ability to meet the deficit reduction targets agreed in its 78-billion-euro rescue package from the International Monetary Fund and the European Union because of weak economic growth, a situation that could preclude it from returning to the primary debt market.

There is a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," the ratings agency said.

The downgrade came hours after Portugal's IGCP debt management agency sold 848 million euros in three-month bills at an average weighted yield of 4.926 percent, up from 4.863 percent at an auction held on June 15.