Interest rates on Italy's enormous debt jumped on Thursday, a week after the country's credit rating was downgraded, while the public deficit climbed in the second quarter.
It was bad news for a nation which has been weighed down by low growth and high debt for years and risks being dragged into a debt spiral along with bailed-out eurozone partners Greece, Ireland and Portugal.
The public deficit climbed to 3.2 percent of gross domestic product (GDP), breaching the European Union ceiling of 3.0 percent for public deficits on budgets by the central state, welfare systems and local authorities.
In the first six months of the year, the public deficit had dropped by 0.1 percent to 5.3 percent of GDP, the National Institute of Statistics ISTAT said.
Italy's public deficit for the year is forecast at 3.9 percent of GDP, but according to Fabio Fois from Barclays Capital, in light of the half-year primary deficit, the government may miss its target by 0.2 or 0.3 percent points.
The rise in deficit in the second quarter was due to a 1.6 percent increase in public spending over a year, while government revenue rose 0.1 percent.
Italy has an enormous debt of over 1.9 trillion euros, which comes to around 120 percent of the country's output.
Investors panicked this summer when they feared the eurozone debt crisis would spread, selling off Italian debt.
The European Central Bank resumed its intervention in the debt market in August to keep Italy's interest rates from rising to unaffordable rates that would force Rome to seek a bailout.
On Thursday morning, the Italian Treasury placed 7.85 billion euros ($10.7 billion) in bonds with sharply higher interest rates, signalling renewed discontent on the markets.
It was the first time Italy sold bonds since Standard & Poor's downgraded Italian debt to "A/A-1" from a "A+/A-1+" grade because of "Italy's weakening economic growth prospects."
The Italian treasury had hoped to issue between 5.5 and 9.0 billion euros. Demand was 11.5 billion euros, according to the Bank of Italy -- a disappointing result according to some analysts.
"All in all, today's issue was not at all satisfying," Annalisa Piazza from Newedge told AFP.
Interest rates rose most notably on bonds expiring in 2014 to 4.68 percent compared to 3.87 percent at the last similar operation.
They also rose to 5.86 percent compared to 5.22 percent for bonds expiring in 2022 and to 5.63 percent up on 4.58 percent for those expiring in 2015.
The interest rates will cost Italy dearly but are still "maintainable" for the Treasury, according to a Milan analyst.
The rise in borrowing prices comes despite efforts by Rome to reassure markets by adopting an austerity package in mid-September -- on the back of a package in July -- aiming to bring the country's budget back into balance by 2013.
On Thursday afternoon, Finance Minister Giulio Tremonti met with Italian investors as part of the state's plan to sell part of its assets to reduce public debt. It was the first of a series of meetings, the ministry said.
A government previously said that the state may sell up "between five and ten billion euros," of real estate assets or ceding holdings to free up funds to help reduce its debt.