Greece passed its first borrowing test on Tuesday since a giant EU/IMF funding deal in May, sending bank stocks and the euro higher after it easily sold 1.625 billion euros ($2.03 billion) of 6-month T-bills. The debt-ridden country managed to get market funding at a slightly cheaper cost than the 5.0 percent it pays to borrow under the 110 billion euro loan that the European Union and International Monetary Fund put in place to calm a crisis that has shaken the euro zone.

But the auction highlighted Greece still had some way to go in convincing investors. The yield was higher than a previous similar sale and what other troubled euro zone economies have paid recently, and demand, while solid, was lower.

We were expecting a good result, and it's good for Greece and the euro, but (Greece) has a long way to travel, as its economic challenges are pretty severe. It's going to take years to figure this out, not just one auction, said Paul Robinson, a currency strategist at Barclays Capital in London.

Less oversubscribed than a previous auction in April, the sale produced a yield of 4.65 percent versus 4.55 percent in an April 13 sale of similar duration paper, the outcome broadly in line with expectations. Tuesday's bid-to-cover ratio was slightly better than forecast at 3.64 -- though less than half the 7.67 times oversubscription in the previous April auction.

We are happy with the outcome of the auction, debt agency (PDMA) chief Petros Christodoulou told Reuters. We were pleasantly surprised with the foreign participation. Markets had expected the issue would be mostly picked up by Greek banks. Christodoulou would not elaborate on how much was taken up by foreigners.

COSTLY BORROWING Punished for fiscal profligacy, Greece is paying for six-month paper 8 times what it costs Germany to borrow for one year DE1YT=RR, highlighting the struggle it faces to restore market confidence. It is also paying much higher costs than other euro zone periphery countries facing fiscal problems although their costs have also been rising.

Portugal sold six-month T-bills at 1.947 percent on July 7, while Spain had to pay a yield of 1.577 percent on June 22 for six-month paper. It's a marginally positive result. It could have gone worse. On the other hand, Greece is sheltered from any fiscal default over at least the next six months, or two years, said Citigroup economist Giada Gianni.

Since it's a very short-term maturity, it does not reflect markets' expectations in terms of Greece's development in the next years. It's very difficult to say whether it reflects market confidence in Greece, she said.

Still, being able to tap markets for six-month funds was enough to give battered Greek bank shares a boost, driving the sector's index .FTATBNK 4.5 percent higher with the euro gaining some ground against the dollar.

The debt agency accepted an additional 375 million euros in non-competitive bids, bringing total proceeds to 1.625 billion euros to roll over maturing short-term paper. Settlement date is July 16. Another auction of three-month paper will follow next week to roll over 2.4 billion euros of maturing T-bills. PDMA provided the following details: ********************************************************* 26-WEEKS AUCTION DATE July 13 Apr 13 ISSUE DATE July 16 Apr 16 MATURITY Jan 14 Oct 15, 2010 AMOUNT AUCTIONED 1.25 bln 600 mln TOTAL BIDS 4.546 bln 4.602 bln -Competitive 4.154 bln 4.372 bln -Non-competitive 392 mln 230 mln COVERAGE RATIO 3.64 7.67 TOTAL ACCEPTED AMOUNT 1.625 bln 780 bln UNIFORM YIELD 4.65% 4.55% CUT-OFF PRICE 97.703 97.752 CUT-OFF RATIO 64.38% 18.67% SECOND-DAY BIDS AUTHORISED AMOUNT 375 mln 180 mln ----------------------------------------------------- source: PDMA (additional reporting by Renee Maltezou, Harry Papachristou in Athens; Reporting by George Georgiopoulos; Editing by Ruth Pitchford)