* Portuguese bonds suffer, drag peripheral yields up
* Weak U.S. jobs data helps stem sell-off
* Expectations of ratings upgrade cap rise in Greek yields
(Adds fresh quote, updates prices)
By Emelia Sithole-Matarise and John Geddie
LONDON, Aug 1 Portuguese bond yields rose on
Friday, weighing on other lower-rated euro zone sovereigns, amid
expectations Lisbon will bail out the country's biggest bank
after it reported massive losses.
Banco Espirito Santo's problems intensified this week, when
it posted a worse-than-forecast 3.6 billion-euro loss and saw
its top officials suspended over suspected harmful management.
Its shares fell to record lows before being suspended.
"The Banco Espirito Santo problems don't seem to be going
away that easily," said Alessandro Giansanti, an ING strategist.
Portuguese 10-year yields hit highs of 3.78 percent in early
trading, up some 14 basis points on the day. They pared losses
in the afternoon after a lower-than-expected reading of U.S.
Weak jobs data in the world's largest economy makes it less
likely the United States will raise interest rates soon - a move
investors fear would push up government borrowing costs
As European markets drew to a close on Friday, Portugal's
yields were 6 bps higher at 3.70 percent. Italy
and Spain equivalents were 4 bps and 3 bps higher respectively,
at 2.73 and 2.54 percent . Irish
yields were 2 bps up at 2.25 percent.
Analysts said the Bank of Portugal would prefer that BES
raise capital from private sources, but shaken investors may not
stump up the full amount, leaving the government to fill the
"Portugal have said they want capital for BES from private
investors, but I don't think it will be enough. They will need
to use the money set aside for banks and that should be enough
to cover any further recapitalisation of the bank," said ING's
Portugal, which just emerged from a sovereign bailout in
May, has 6.4 billion euros of funds for bank recapitalisations.
But while BES' problems seem manageable in isolation, some
in the market fear the wider repercussions of bank stress tests
due to be published in October.
"I don't think the latest BES news is particularly negative
for the sovereign ... but maybe people are thinking there could
be more of these. Maybe the AQR (Asset Quality Review) will make
us more focused on the bank-sovereign link in the coming
months," said Steven Major, global head of fixed income research
Greek 10-year bond yields, which usually see
larger swings because of their low liquidity, were up 4 bps at
6.09 percent. They fell earlier as investors anticipated a
credit ratings upgrade from Moody's later in the day.
Moody's has an extremely speculative Caa3 rating on Greece,
the worst in the euro zone. It is scheduled to review the rating
on Friday, although any announcement will come after the market
Some market participants say an upgrade looks possible.
Greece's economic outlook has improved and it held two
successful debt sales this year, after its 2012 default.
Moody's one-notch upgrade of Portugal's ratings despite the
problems facing its biggest bank fuelled expectations of similar
action for Greece.
"Moody's is still lagging the other rating agencies, so a
bit of a catchup upgrade for Greece by about up to two notches
is very possible," said Rainer Guntermann, a strategist at
Commerzbank. "It won't come as a big shock to the market, but as
always with official confirmation some accounts may feel more
comfortable in adding to their positions (on Greek bonds)."
(Editing by Larry King)