UPDATE 1-Greece's short-term funding costs rise after S&P
* Greece raises 1.625 bln euros from sale
* Yield up 8 basis points to 4.96 pct vs May auction
* Bid-cover ratio 2.58 vs 3.58 in previous sale
* Foreign investors buy 37 pct of issue
(Adds details, dealer comment)
By George Georgiopoulos
ATHENS, June 14 (Reuters) - Greece's short-term borrowing costs climbed at an auction on Tuesday, a day after Standard & Poor's cut its rating to the lowest of any country it covers and warned that a move to restructure its debt would be considered a default.
Barely a year after Athens was granted a 110 billion euro bailout package, the EU, the IMF and the European Central Bank are haggling over a second funding deal, while Greece's ruling party is struggling to push unpopular austerity measures through parliament.
Greece sold 1.625 billion euros of six-month T-bills, including 375 million in non-competitive bids. The issue was priced to yield 4.96 percent, up eight basis points from last month and above the rate of about 4.2 percent that Athens pays on its EU/IMF bailout loans.
The auction drew greater interest from foreign investors, who bought 37 percent of the issue compared with 34.2 percent at last month's auction, as Greece continues to fund itself in the market for short periods. But the bid-to-cover ratio, a gauge of overall demand, fell to 2.58 from 3.58.
"Yesterday's S&P downgrade weighed on sentiment, resulting in a lower cover ratio and a higher yield," said a fixed-income trader at a Greek bank.
"The market is also cautious ahead of the parliamentary vote on the government's mid-term fiscal plan later in June," added the trader, who asked not to be named.
European leaders are due to finalise a new rescue package for Greece at a Brussels summit on June 23-24, but differences remain over how to involve private creditors, pushing the cost of insuring Greek government debt against default up to a record high 1,600 basis points on Monday.
Investors are asking Greece to pay 1,428 basis points more than Germany to borrow for 10 years, with the yield spread at record highs and 10-year paper GR10YT=TWEB yielding over 17 percent as markets become increasingly convinced that Athens will have to restructure its debt. [ID:nLDE75D0DQ]
S&P's cut on Monday means Greece now has a lower credit rating than countries such as Pakistan and Ecuador, which has been shut out of international markets since a 2009 default. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds. [ID:nN13126859] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ TAKE A LOOK-EU seeks Greek solution [ID:nLDE68T0MG] Analysis on EU muddling through Greek crisis [ID:nLDE7582B2] Analysis on Greece's bond market shut out [ID:nLDE7481Q7] Graphics on bank exposure to euro zone debt:
Until March, Greece was funding itself on short durations at a lower cost than the 5.2 percent rate on its bailout loans. Euro zone leaders then agreed in March to cut that rate by 1 percentage point and stretch out the repayment period. [ID:nL3E7EB0D7]
Analysts say demand for T-bills is fuelled by their likely exclusion from any restructuring as well as demand from domestic banks, who can use them as collateral to secure low-cost ECB funding.
No Greek T-bills mature this month but debt agency PDMA needs to roll over 2.4 billion euros of six-month T-bills on July 15 and another 2.0 billion euros of three-month paper maturing on July 22. It is set to auction three-month T-bills the following week.
The settlement date for the 26-week T-bill auction is June 17. (Editing by Hugh Lawson)