* Lisbon agrees 4.9 bln BES bailout after weekend discussions
* Portuguese bond yields slip 1.4 bps
* Italy, Spain bond yields 3 bps lower (Updates prices, adds more analyst comments, detail)
By Emelia Sithole-Matarise
LONDON, Aug 4 (Reuters) - Portuguese bond yields fell on Monday after Lisbon agreed a near 5 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 and use a chunk of the 6.4 billion euros left from a fund earmarked for banks as part of its EU/IMF bailout.
Trading in BES shares remained suspended but Portuguese 10-year bond yields were down 7 basis points (bps) to 3.65 percent as many in the market saw the BES problems as essentially under control for now.
The yields rose about 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.
“The market seems to be mostly relieved that we are seeing a clear cut decision by Portugal now on the situation on BES,” DZ strategist Christian Lenk said.
“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 cash position of the Portuguese government and its ability to tap markets for capital, I don’t see the danger for public finances,” he said.
Though many in the market view BES as an isolated case in Portugal, some strategists were concerned that its rescue would seriously diminished the country’s bank recapitalisation fund were another bank to need help.
“We think that the sovereign financial implications of the BES saga remains limited,” Barclays strategists said in a note.
“But we expect investors to remain guarded about risks which could stem from latent problems in the financial system as the amount of financial resources left available to deal with any potential problem in the banking sector has declined substantially.”
Yields on Italian and Spanish 10-year bonds were 7 and 6 bps down at 2.69 and 2.49 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.
“We still see an outperformance of peripherals against core (euro zone bonds) from here,” Citi’s global head of rates strategy, Alessandro Giansanti, said.
“Demand, especially for Spain, is really strong. We still see spread tightening, another 15-20 basis points in terms of Spanish outpeformance perhaps versus Italy.”
Greek yields were 4 bps lower at 6.06 percent after Moody’s upgraded its rating by two notches to Caa1, citing its improved fiscal position. Moody’s upgraded Portugal a week ago, dismissing concerns that troubles at BES could spread. (U.S. dollar = 0.7450 euro) (Editing by Louise Ireland)