* Lisbon agrees 4.9 bln BES bailout after weekend discussions
* Portuguese bond yields slip 1.4 bps
* Italy, Spain bond yields 3 bps lower
By Emelia Sithole-Matarise
LONDON, Aug 4 Portuguese bond yields slipped on Monday after Lisbon agreed a 4.9 billion euro ($6.6 billion) bailout of its biggest bank in a plan that reassured debt investors there would be no wider strain on public finances.
After frenzied weekend discussions between Portuguese and European Union officials, Lisbon agreed to rescue Banco Espirito Santo, just months after the country exited an international bailout.
Portugal's central bank, which only days ago said that BES could be recapitalised by private investors, said the plan would involve no cost to the public purse because the loan would be temporary.
The Portuguese government loan for the BES rescue will use up a large chunk of the 6.4 billion euros left over from a fund earmarked to aid the country's banks as part of its EU/IMF bailout.
Portuguese 10-year bond yields fell 3.3 basis points to 3.68 percent as many in the market saw the BES problems as essentially under control for now. The yields rose around 20 bps last week to a high of 3.78 by Friday as BES edged closer to a state bailout after unveiling massive losses and had its top officials suspended for suspected harmful management.
"The market seems to be mostly relieved that we are seeing a clear cut decision by Portugal now on the situation on BES," said Christian Lenk, a strategist at DZ Bank.
"I doubt we will see some kind of systemic risk stemming from the BES affair ... Of course it would have nice for BES to get money from private investors but given the (strong) cash position of the Portuguese government and its ability to tap markets for capital, I don't see the danger for public finances."
RATINGS UPGRADES HELP
Yields on Italian and Spanish 10-year bonds were 5 and 4 bps down at 2.71 and 2.51 percent respectively with strategists seeing little risk of the contagion that unsettled markets in early July when the BES troubles first came up.
The European Central Bank's ultra-easy monetary policy, which it is expected to reiterate at its meeting on Thursday, and fresh injections of cheap four-year loans later this year are supporting demand for peripheral euro zone bonds.
Greek yields were also lower at 6.07 percent after Moody's upgraded its ratings by two notches to Caa1, citing its improved fiscal position. Moody's also upgraded Portugal's ratings a week ago, dismissing concerns that troubles at BES could spread.
Rabobank strategists said the positive rating actions as well as historic low borrowing costs for the euro zone weaker issuers compounded the positive sentiment in the bond market.
"All of this means we overall remain positive on peripheral spreads though caution that the significant compression that has already been seen means that momentum is likely to be less going forward," they said in a note.
(1 US dollar = 0.7450 euro) (Editing by Toby Chopra)