Brussels - The European Union turned top guns against credit ratings agencies on Wednesday in a scathing attack on their credibility for warning about financial prospects in Portugal and Greece.
The controversial decisions by the agencies plunged the eurozone deeper into turmoil just as finance ministers struggle to stitch together a second bailout for Greece without triggering a default crisis.
The euro fell and the cost of borrowing for Portugal shot up, pulling up rates for Spain and Italy as well.
The moves revived calls for the creation of a credit ratings agency in Europe to act as counter-weight in a market dominated by US-based agencies.
"We must break the oligopoly of the ratings agencies," said German Finance Minister Wolfgang Schaeuble, adding that he wanted to "break" their power and "limit" their influence.
European Union officials and ministers reacted furiously after Moody's Investors Service downgraded Portuguese debt to junk status and warned that Portugal may need a second bailout, just as Lisbon begins to implement austerity measures in return for a first 78-billion-euro EU-IMF rescue agreed earlier this year.
The Moody's downgrade on Tuesday came one day after another agency, Standard & Poor's, warned that a eurozone plan to involve private creditors in the new bailout of Greece could amount to a debt default, thereby raising the risk of a damaging domino effect.
"I deeply regret the decision of one rating agency to downgrade the Portuguese sovereign debt, and I regret it most in terms of its timing and magnitude," said European Commission president Jose Manuel Barroso.
The agency's remarks "do not provide for more clarity, they rather add another speculative element to the situation," he told reporters at the European parliament in Strasbourg.
In Berlin, Greek Foreign Minister Stavros Lambridinis denounced the "madness" of self-fulfilling prophecies by the agencies.
German Chancellor Angela Merkel has voiced her own frustration with the agencies, saying the European Commission, the European Central Bank and the IMF should not "relinquish our freedom to judge."
At Credit Mutuel-CIC, strategists said: "The face-off between the rating agencies and the European authorities is going to get tougher, as is shown by the latest statements by (German Chancellor) Angela Merkel against S&P (rating agency)."
French Finance Minister Francois Baroin expressed confidence in Portugal. "It is not the view of a ratings agency which is going to deal with sovereign debt," he said.
Amadeu Altafaj, the commission's spokesman for economic affairs, said Moody's timing was "questionable" and based on "hypothetical scenarios" which contradicted the European Union's own assessments.
"This is an unfortunate episode and raises once more the issue of the appropriateness of behaviour of credit agencies and of their so-called clairvoyance," he told a news briefing.
The views of the agencies on eurozone plans to provide a new bailout for Greece will be key and European diplomats say they are being consulted to determine how they would interpret different options being explored.
The eurozone is scrambling to craft a plan, pushed by Germany, in which banks, insurers and pension funds would agree to roll over their Greek debt in a way that will not be described as a default by credit ratings agencies.
"It's in the interest of everyone, at least the politicians and the ECB, to come up with a scheme that is not a default, and if this requires involvement of the ratings agencies, so be it," said ING senior economist Carsten Brzeski.
But S&P poured cold water on a French proposal for private creditors to replace Greek debt that is about to mature with new 30-year bonds.
Delivering the type of message the eurozone desperately wants to avoid, S&P said the "debt rollover proposal could result in a selective default for Greece."
While the eurozone cleared the way for Athens to receive €12bn ($17bn) from its first bailout and avoid default this month, it has delayed a decision on the second rescue package until September.
Leading banks were meeting in Paris on Wednesday to figure out how they could contribute to the new rescue package.
The 17-nation single currency area's finance chiefs are meeting again on Monday to discuss the plan, but no major breakthrough is expected.