Europe hits back over junk rating

European leaders yesterday condemned a downgrade of Portugal by Moody's Investors Service, questioning the basis of a move that could raise the threat of contagion in Europe's ongoing sovereign debt crisis.

European leaders struck back yesterday after one of the world's biggest credit ratings agencies downgraded Portugal to junk status, raising fresh alarm about contagion in the continent's sovereign debt crisis.

Following the downgrade by Moody's Investors Service, Wolfgang Schaeuble, the German finance minister, said agencies that evaluate the creditworthiness of countries needed to be held in check.

"We need to break the oligopoly of ratings agencies," he said, according to a Dow Jones report.

Mr Schaeuble said he was surprised by the downgrade because Portugal was fulfilling pledges to enact austerity measures as a condition for financial aid.

"I can't decipher what the basis of this evaluation is," he said.

The European Commission added its own criticisms of the decision by Moody's, the first of the world's big three agencies to plunge Portugal below what it considers investment grade.

"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," said Amadeu Altafaj, the European Commission spokesman, according to a Reuters report. "This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies."

Portugal's new government also decried the move, saying it ignored fiscal reforms the country had made to help to reduce its budget deficit.

The reactions were prompted by a report late on Tuesday in which Moody's downgraded Portugal by four notches on its ratings scale from "Baa1" to "Ba2" and gave it a negative outlook. Moody's said the country's finances were in sore need of repair and that the country might need a second bailout from the EU and the IMF.

Moody's also pointed to concern that Portugal might not achieve deficit reduction goals set out as part of a €78 billion (Dh410.66bn) aid package the country received only two months ago. The IMF expects the debt-laden country's GDP to decline by 1.5 per cent this year, and unemployment is in the double digits.

The downgrade came at a sensitive juncture for European leaders who are trying to find a solution for Greece's crippling debt problems and prevent its crisis from spreading to other troubled countries in the euro zone. Greece was cleared last week to receive a further round of aid as governments coordinate with banks to give it breathing room to repay debts and avoid a default.

Markets reacted sharply to the downgrade, with the euro weakening against most major currencies and oil prices falling. Bond prices in other troubled European economies fell, while gilt prices increased as investors sought a safe haven.

Portuguese stock prices fell, and the country's cost of borrowing went up in an auction of government debt conducted shortly after the downgrade.