Portugal borrowing costs edge down

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Banco Espirito Santo123456 Reuters. People walk past an office of Portuguese bank Banco Espirito Santo (BES) in downtown Lisbon August 2, 2014.

Paris - Portugal's borrowing costs edged down on Monday after the government announced a rescue package worth nearly 5.0 billion euros for troubled Banco Espirito Santo, the country's largest private bank.

The European Commission gave its approval to the state bailout, saying it was in line with EU competition rules and would help reestablish confidence in the Portuguese financial system.

The market response was muted, with the interest rate on existing Portuguese 10-year bonds falling to 3.684 percent from 3.701 percent on Friday.

The Portuguese state announced on Sunday it would rescue BES with 4.4 billion euros (R63 billion) out of a total support package of 4.9 billion euros.

The government also separated the bank's bad assets into a separate entity and ensured that shareholders pay a heavy price under new EU rules, introduced at the height of the eurozone debt crisis and now being used for the first time, to limit the effect of a bank failure on taxpayers and government debt.

The government will draw the rescue cash from funds allocated for banks under Portugal's bailout organised by the International Monetary Fund and the European Union, which the country emerged from in May.

The funds for helping banks totalled 12.0 billion euros and 6.4 billion of this remains available.

BES is in difficulty largely because of problems, and suspected improper accounting practices, in the accounts of the Espirito Santo Group of companies built around three holding companies which are under administration procedures.

The crisis raised concerns that the collapse of the bank - which has interests throughout the economy - could shake confidence in the Portuguese financial system.

Nevertheless, borrowing rates for Portugal remained at low levels, having fallen sharply in recent months.

The decline reflected in part a guarantee by the European Central Bank that it would buy bonds of eurozone countries in difficulty, subject to tough conditions, and Portugal's success in winning enough market confidence to be able to emerge from its IMF-EU bailout programme.

However, at the beginning of July, the yield on Portuguese 10-year bonds traded on the secondary market crept above 4.0

percent because of concern about possible contagion from the crisis at BES.

The price of Portuguese bonds then rallied, automatically depressing the fixed interest yield, after rating agency Moody's upgraded its notation for Portugal's creditworthiness.

Interest rates on debt issued by other eurozone countries in southern Europe also eased on Monday.

The yield on Spanish 10-year debt slipped to 2.532 percent from 2.560 percent on Friday and the rate indicated by Italian debt fell to 2.729 percent from 2.758 percent. - Sapa-AFP



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