July 14, 2014 / 4:00 PM / 3 years ago

Portuguese bond yields fall after BES acts to reassure investors

* Portugal’s BES takes steps to ease worries over its health

* Portuguese yields fall, periphery markets stabilise

* Last week’s sell-off a reminder of euro zone problems (Updates prices, adds fresh analyst comments)

By Marius Zaharia

LONDON, July 14 (Reuters) - Portugal’s bond yields fell further on Monday after its biggest bank took steps to reassure investors of its stability, calming weaker euro debt markets after their first episode of contagious weakness 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 ($2.9 billion) in capital above minimum regulatory requirements, which would cover any losses for its 1.15 billion exposure to the Espirito Santo business empire.

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. Yields on 10-year Greek bonds, which bore the brunt from the fallout from Portugal, were 5 bps down at 6.25 percent while Spanish and Italian yields were flat to 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 since its 2012 default.

“It looks like what happened last week was a hiccup and nothing like a serious tremor. We still have a lot of volatility on the Portuguese banking stock sector but the market seems to be now in a situation where it can treat this as fairly isolated,” said David Schnautz, a stategist at Commerzbank.

“It looks like some investors are already looking at treating this as an opportunity to buy on dips.”


Rabobank market economist Emile Cardon said last week’s concerted sell-off of peripheral debt showed that investors remained nervous 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 9 bps lower at 3.18 percent after political newcomer Miro Cerar led his party to victory in elections on Sunday.

Uncertainty about the scale of 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. ($1 = 0.7331 Euros) (Additional reporting by Emelia Sithole-Matarise; Editing by Nigel Stephenson/Ruth Pitchford)

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