Greece has passed its first borrowing test since euro zone leaders agreed on a potential aid package, but the high price it paid on Tuesday for short term cash failed to quash doubts that it can beat its crisis alone.
The debt-laden Mediterranean state drew heavy demand at auctions in which it sold 1.56 billion euros of 6-month and 1-year treasury bills, filling a short-term financing gap and buying time to consider whether to grab the estimated 45 billion euro ($61 billion) EU/IMF aid deal.
But the hurdle of a 10-year, 8.5 billion euro bond that it must raise money to repay in May still looms, and analysts said the country of 11 million faced a long-term slog to win back investor confidence and return to economic health.
Markets, too, were unconvinced, with yields of Greece's 10-year benchmark bonds erasing gains from a rally following the aid agreement to rise within a percentage point of euro-era highs hit last week when some investors feared possible default.
"Today's successful Greek short-term debt auctions will further ease fears about Greece meeting its near-term financing needs, but it still faces an uphill struggle to return the public finances to a sustainable position," said Ben May, an analyst at Capital Economics.
Analysts noted that the interest rates were more than double previous tenders and signaled persisting investor doubt that could eventually drive Athens to grab the aid lifeline.
The government is trying to cut last year's public sector deficit by around a third to 8.7 percent of gross domestic product this year, but the spike in its debt costs has raised spending and its budget measures are expected to deepen an economic contraction of 2 percent, making that goal difficult.
It has not yet asked to tap the aid, which includes an extra 10-15 billion euros from the International Monetary Fund, and Finance Minister George Papaconstantinou said Athens would stay with its plan of tapping external markets.
"We are sticking to our target and I believe we will continue to borrow from markets smoothly, as we did today with the T-bills," Papaconstantinou told parliament.
"The Greek government has not asked for the mechanism to be activated, although it remains available if needed."
The EU's executive prepared for a debate on Wednesday on cleaning up budget rules to end an era when Greece and its euro zone periphery peers Spain, Portugal and Ireland have dug themselves into pitfalls by fiscal profligacy and overborrowing.
The aid deal was agreed despite resistance from Germany, where Prime Minister Angela Merkel has stressed Greece should not be given clemency after years of budgetary sins.
Some analysts suspect the announcement of the deal's details on Sunday was to buy time ahead of a May 9 German election to avoid giving voters opposed to helping Athens a reason to punish Merkel and rob her government of its parliamentary majority.
Still, euro zone officials gave a thumbs-up to the rescue package and backed Greece's stance of first shunning the aid.
"Greece is now in a stronger position because we have built up a back-stop position," European Central Bank Governing Board member Ewald Nowotny told reporters. "The aid program is not a gift, it is a loan. It is helping Greece to help itself."
The announcement of the deal on Sunday has raised fears among some Greeks and labor unions that it could lead to further austerity steps on top of the public wage cuts, pension freeze and tax hikes the government has already taken.
Prime Minister George Papandreou's government said the net gave Greece breathing space to focus on fiscal consolidation rather than fending off punishment from skeptical markets.
"We can turn our attention with greater calm to domestic challenges and promote the necessary changes," he said.
Following a brief rally after the T-bill auctions, the euro fell to a session low versus the dollar of $1.3568, from a near one-month high of $1.3691 on Monday.
The premium investors demand to buy Greek 10-year state bonds rather than their German benchmark counterparts rose around a fifth of a percentage point to 375 basis points. Last week it hit a euro era high of 463.
Greek banking stocks lost more than 4 percent, with analysts saying players were booking profits after a two day rally following the aid deal. Demand for the debt was high at 8.5 billion euros.
The auction produced a uniform yield of 4.85 percent for the one- year paper and 4.55 percent for the 6-month.
"On a more negative note, yields are still high, showing that markets are still cautious about lending money to Greece," said Diego Iscaro of IHS Global Insight.
Most of the demand, as with T-bill tenders in most countries, was dominated by local banks.
Interest from abroad has taken a major hit since its risk premium spiraled to euro record highs last week.
On Monday, the head of investment fund Pacific Investment Management (Pimco) said the fund would not be buying new Greek debt because it thought the euro zone rescue deal would not tackle long-term solvency problems.
That was followed on Tuesday by a recommendation by ABN Amro's private bank to avoid Greek bonds because it was still unclear whether Athens could carry out its promised reforms.
"We are far from done on the fiscal adjustment in Greece," the bank's chief investment officer Didier Duret said.
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