Portuguese bond yields fall after BES takes steps to reassure market

LONDON, July 14 Mon Jul 14, 2014 3:50am EDT

LONDON, July 14 (Reuters) - Portuguese bond yields fell further on Monday after the country's biggest bank took steps aimed at reassuring investors of its stability, calming peripheral debt markets after their first episode of contagion this year.

Recent disclosures of financial irregularities at a web of family-held holding companies behind Portugal's largest listed bank, Banco Espirito Santo, had pummeled the country's stocks and bond markets.

BES said last week that it had 2.1 billion euros in capital above minimum regulatory requirements, which should be enough to cover any losses for its 1.15 billion exposure to Espirito Santo.

On Monday BES said its board has put in place new executives who were originally supposed to take over at the end of July, after the Bank of Portugal brought forward management changes there aiming at distancing the bank from the financial woes of its founding family.

Portuguese 10-year bond yields fell 9 basis points to 3.80 percent, retreating further from a six-week high above 4 percent hit last week. Spanish, Italian and Greek bond yields also fell.

Last week, the sell-off in Portuguese bonds spread to the euro zone's other weaker members and hurt demand at Greece's second bond sale after its 2012 default in the first significant bout of debt market contagion in 2014.

"The markets will recover a bit," said Emile Cardon, a market economist at Rabobank.

"But I'm a bit cautious. There's still reason to believe that not all problems were resolved in the euro zone and we will continue to see bouts of volatility during a fragile recovery."

Credit Agricole rate strategist Peter Chatwell said the fact that Portugal has already done some prefunding for next year and that there was still a residual 6 billion euros from its rescue programme available for its banking sector should prevent an extended escalation of the sell-off in the periphery.

"But the risk is for periphery to remain vulnerable in the near-term until there is more information on the situation and a plan of action," Chatwell said.

Elsewhere, Slovenian 10-year bond yields were 3 basis points higher at 3.30 percent after political newcomer Miro Cerar led his party to victory in elections on Sunday and indicated that he aims to rewrite a reform package agreed with the European Union to fix his country's budget problems.

Hiccups in Slovenia's privatisation programme lifted Slovenian bond yields in recent weeks, but some investors said they will use that as a buying opportunity, betting Cerar can reduce the government's 50 percent stake in the economy and cut the budget deficit. (Reporting by Marius Zaharia; Editing by Hugh Lawson)

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