Portuguese yields dip as Lisbon pledges "clean" bailout exit

Mon May 5, 2014 6:25am EDT

* Portugal says to exit bailout without back-up loan

* Portuguese 10-year yields pinned at 8-year lows

* Slovenia yields rise after prime minister resigns (Updates prices, adds developments in Slovenia)

By Emelia Sithole-Matarise

LONDON, May 5 (Reuters) - Portuguese bond yields fell on Monday after Lisbon said it would exit its international bailout programme later this month without a back-up loan, a bold step for a country that two years ago was thought to be at risk of defaulting on its debts.

Like Ireland, which in December became the first euro zone country to exit a bailout, Portugal aims to make a clean break from its financial support.

Lisbon has been helped by an easing of the wider euro zone debt crisis, which has spurred yield-hungry investors' appetite for the region's lower-rated government bonds.

Portugal's brighter prospects contrast with smaller euro zone member Slovenia which has been thrown into political uncertainty after Prime Minister Alenka Bratusek resigned after losing her party's leadership 10 days ago.

Portuguese 10-year bond yields fell 2 basis points to 3.61 percent, their lowest since 2006, according to Reuters data, outperforming other euro zone bonds in thin trade due to a holiday in Britain - Europe's busiest financial centre.

Its yields are now down to just a fraction of the near 17-percent peak they hit at the height of the debt crisis in 2012.

"It's a bold move by Portugal to move out without asking for a precautionary credit line, but the government is confident that it can get funding from the market," ING strategist Alessandro Giansanti said.

"They are already funded for this year and doing pre-funding for next. That goes alongside an improvement in periphery (euro zone states) which is helping the smaller countries, and as long as the mood from investors remains positive for risky assets, that's helping Portuguese government bonds," he said.

The country held its first bond auction in three years successfully last month, paying a record low yield that was seen as a vote of market confidence and a boost for its chances of cleanly exiting its bailout on May 17.

The government has won back confidence by sticking to the austerity policies and reforms required as part of the bailout it took in 2011, investors say.

The drop in its borrowing costs to multi-year lows continues a trend of sharp declines since 2012 driven by signs the euro zone crisis is abating as well as by the prospect of European Central Bank asset purchases and by Portugal's own return to economic growth and lower deficits after a brutal recession.

RATING REVIEWS EYED

Some in the market, such as Commerzbank strategists, said these improvements might prompt upgrades to the country's credit rating. All three major rating agencies - Moody's, Standard & Poor's and Fitch - have junk ratings on Portugal.

Moody's, which assigns the country its lowest rating of Ba3, and S&P are due to announce the results of their reviews of Portugal's creditworthiness on Friday.

"Reading what it would take to upgrade Portugal, we expect a one-notch upgrade with a positive outlook in our base case scenario. At the very least, Moody's should lift the outlook to positive," Commmerzbank strategists said in a note.

Fitch already has a positive outlook on Portugal and S&P is expected to follow suit.

"The prospect of Portugal at least carrying three positive outlooks by the end of the week should not just help defending current PGB (Portuguese Government Bond) yield levels but should also open the door for another leg lower," Commerzbank said.

Slovenian 10-year bond yields rose 7 bps to 3.53 percent after Bratusek's resignation as premier, paving the way for early elections. Bratusek, under whose government the country narrowly avoided an international bailout last year, said she hoped the elections would be held by the summer.

Analysts said the political uncertainty may slow or even halt plans to sell off state assets but said Slovenia was unlikely to need outside financial help for now. (Editing by Louise Ireland)

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