Europeans Caution Ratings Agencies After the Downgrade of Portugal’s Debt

The downgrade included a warning that Portugal, like Greece, might need a second bailout, pushing European stock markets lower on Wednesday and adding to the woes of Ireland, Spain and Italy as traders dumped their bonds, forcing their interest rates up.

Portuguese and European officials condemned the ratings agencies for intensifying the euro crisis, suggesting they were overreacting after they were admonished for moving too slowly to warn of problems in the United States. The move by Moody’s added “another speculative element to the situation,” said José Manuel Barroso, the president of the European Commission.

With both Standard Poor’s and Moody’s making it more difficult for policy makers handling the bailouts of Greece, Portugal and Ireland, the European commissioner for financial regulation said the credit-rating agencies needed to tread carefully.

“I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect E.U. rules,” Michel Barnier, the financial regulator, said in a statement from Brussels. “They should learn the lessons from the past.”

The urgency grew as Europe’s biggest banks met with central bankers on Wednesday to figure out ways to put together a second bailout package for Greece that would include contributions from private creditors, despite opposition from the European Central Bank and the rating agency warnings that the proposals discussed so far would be tantamount to a Greek default.

Portugal’s junk rating means that Europe’s banks may face wider losses if their efforts to help Greece falter. The banks, which met under the auspices of the Institute of International Finance, a lobbying group of the 400 biggest banks and insurance firms in the world, were trying to reshape a proposal to give Athens more time to repay loans as they come due without it being termed a default.

“We need to find a solution that avoids a default,” Michel Pébereau, the chairman of BNP Paribas, the biggest French bank and one of Europe’s biggest holders of troubled Greek debt, said on French radio.

But both banking executives and policy makers seemed to be open to a solution that might involve a brief default and selective write-downs of Greek debt.

Charles H. Dallara, managing director of the Institute of International Finance, said that the move by the rating agencies “helps us see that it may not be practical to devise solutions that avoid all the ratings agencies from judging this a selective default.” The issue, he added, “may be more whether any selective default is temporary and surrounded by an environment that can lead to an upgrade of Greece’s creditworthiness.”

Germany revived a proposal, opposed by the European Central Bank, to persuade lenders to voluntarily exchange their Greek debt for securities that could be paid back much later. German leaders, who do not want ratings agencies to tell them what to do, seemed to be willing to risk a short-lived, technical default to ensure that banks and other financial institutions contributed to the bailout.

But one worry is that any form of default could disqualify Greek debt from the collateral that the central bank requires to continue extending loans. Some bankers have warned that such an event could touch off a panic that would rival the collapse of Lehman Brothers in 2008.

The central bank declined to comment on Wednesday, a day ahead of its planned council meeting, where it is widely expected to bump interest rates up slightly.

But the bigger menace may actually lie hidden, in the form of other financial institutions outside the banking system, including insurance firms and pension funds that are suspected of holding substantial amounts of bonds from troubled European countries.

“If you work backwards and look at Greek public debt and try to understand who owns what, you have a hole of 140 billion euros held by asset managers, pension funds and the like, but there is very little information on the details of those holdings,” said Gilles Moëc, an economist at Deutsche Bank in London. “It’s a much bigger pot than what is actually held by banks, but we don’t know who owns how much, or in which country,” he said.

Many banks have already sold their bonds to hedge funds or the E.C.B., which began buying Greek debt more than a year ago.

According to the most optimistic assessments, banks would contribute about 30 billion euros in debt relief to Greece by agreeing to swap maturing bonds for new ones with longer maturities. That sum would be less than 10 percent of Greece’s outstanding debt.

Officials have not provided any detail on where the 30 billion euros would come from, though. German commercial institutions, which along with French banks are the most exposed to Greek debt, have only about 2 billion euros in Greek bonds that would be part of a rollover plan, according to the German finance ministry.

For German banks, “private sector involvement is very small,” said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy in Athens. “The demand for banks to share the burden is coming too late.”

Also unclear is whether billions of euros in insurance contracts against the possibility of a Greek default are concentrated in the hands of a few companies, and if these companies will be able to pay out what they would owe.

But while a Greek default alone would probably be manageable, the biggest fear has been that lenders would abandon other highly indebted countries — justly or unjustly — further distressing the finances of an even larger swath of the 17-nation euro zone. Those concerns mounted Wednesday as analysts said the Portuguese downgrade could ricochet back to Ireland, which received a bailout last winter and may also wind up being downgraded to junk.

Meanwhile, analysts and traders are starting to ask whether Italy, which has the next highest debt ratio of any euro zone country after Greece, might get caught up in the whirlwind. S. P. warned this month that the economy — the third largest in the euro zone after Germany and France — is not growing fast enough to cover its debts.

Liz Alderman reported from Paris and Jack Ewing from Frankfurt. Stephen Castle contributed reporting from Brussels.

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