London: In sovereign borrowing, as in comedy, timing is everything, and Italy's timing is terrible.

The nation needs to refinance 26 per cent of Eur-ope's second-biggest debt burden just as wrangling over Greece's next rescue sends borrowing costs to euro-era records. The extra yield as investors demand to hold 10-year Italian bonds relative to German bunds rose 15 basis points yesterday to 214, approaching the high of 223 set on June 27.

"Italy has a lot of positives going for it, but foreign buyers are going to be cautious while there's contagion risk," said Steven Major, global head of fixed-income research at HSBC Holdings in London. "Italy needs Greece to be sorted as it and all the other euro-region countries don't need the contagion."

Investor confidence in Italian bonds waned the past two months as Standard & Poor's and Moody's Investors Service said they may cut the country's credit rating because slow economic growth will make it tough to curb debt. Italy's 10-year bond yield topped 5 per cent last week for the first time since November 2008, leaving Italy with rising financing costs as it faces a surge in bond redemptions.

Burden

The Italian government must pay ¤175 billion (Dh929 billion) of maturing bonds and bills in the second half of 2011 and ¤245 billion next year, according to data compiled by Bloomberg. That represents 26 per cent of the nation's ¤1.6 trillion burden. By contrast, the UK, which has total debt of £1.1 trillion (Dh6.6 trillion), has to refinance 13 per cent of the total in the same period.

"If funding costs go higher still because spreads remain high, then it will create a more challenging situation," said William De Vijlder, chief investment officer at BNP Paribas Investment Partners, which manages $780 billion.

"As debt matures and needs to be refinanced, it will be at a higher level. By then, Italy will need to have its budget better under control than it currently is because otherwise the debt-to-GDP ratio would start to accelerate."

Bonds decline

Italian bonds declined this week as talks with banks and insurers about their contribution to a new three-year aid package for Greece dragged on and European Union officials signalled the plan might not be approved until September. Standard & Poor's also said that a proposed rollover of Greek debt maturing through 2014 into longer-term securities would trigger a default rating that EU and European Central Bank officials have said must be avoided.

Italy's bonds took a further hit yesterday on contagion concern after Moody's Investors Service cut Portugal's credit rating to below investment grade, saying the country would likely remain shut out of financial markets beyond 2013 and need a second rescue package.