* Portugal's BES takes steps to ease worries over its health
* Portuguese yields fall, periphery markets stabilise
* Last week's sell-off a reminder euro zone problems not
(Updates prices, adds fresh quotes)
By Marius Zaharia
LONDON, July 14 Portuguese bond yields fell
further on Monday after the country's biggest bank took steps to
reassure investors over 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 pummelled 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 would 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.
The Espirito Santo family also sold part of its stake.
Portuguese 10-year bond yields fell 6 basis
points to 3.83 percent, retreating further from a six-week high
above 4 percent hit last week. Spanish, Italian and Greek bond
yields were flat or a touch lower.
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.
"We've heard from BES that the risks can be contained," said
Christian Lenk, a strategist at DZ Bank. "Markets are taking a
step back, thinking about what happened last week and realising
it's not the end of the world, it's not the end of Portugal.
"The memory of what happened during the crisis is still very
fresh, like a trauma. That's why markets reacted this way... On
the other hand to a certain degree it's justified. Yields have
normalised, but there are still large long-term risks in the
Rabobank market economist Emile Cardon said last week's
concerted sell-off of peripheral debt was a sign that investors
remained nervous about the debt sustainability of these
countries even as they bought the high-yielding bonds.
"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," he said.
Credit Agricole rate strategist Peter Chatwell said the fact
that Portugal had already raised some of the funds it will need
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 periphery sell-off.
"But the risk is for the 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 7
bps lower at 3.20 percent after political newcomer Miro Cerar
led his party to victory in elections on Sunday.
Hiccups in Slovenia's privatisation programme lifted
Slovenian bond yields in recent weeks, but some investors said
they would 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/Nigel