Italy can meet surging debt cost but finding buyers key

NEW YORK -Dividend-paying stocks, an old classic, are now back in vogue.

With the stock market in correction territory, both the rise of dividend yields when stocks fall as well as the tendency of many dividend payers toward smaller swings are winning plaudits. The steady drop in bond yields recently was another factor drawing more interest in defensive stocks that are suddenly less expensive.

Italy could technically afford to pay its current high rates on new debt for years, but spooked investors could in theory stop financing the government long before then, analysts said.

Its yields have soared due to worries it will be the next victim of a euro zone debt crisis that has already claimed Greece, Ireland and Portugal, forcing them to seek international bailouts.

In a clear sign that markets have Rome in their sights, Italian 10-year bond yields rose above those of Spain for the first time in fifteen months on Friday, with both holding above 6 percent.

But with a public debt of 1.9 trillion euros, some 120 percent of gross domestic product, Italy is seen as too big to bail.

After a selloff of Italian assets that started early in July, the country last month paid the highest rate in 11 years to sell new 10-year paper. The gross yield at auction on a 2021 BTP bond rose to 5.77 percent from 4.94 percent at the end of June.

UniCredit analysts estimate that the average cost of new debt for Italy now stands at 5.5 percent compared with an average of 3.98 percent in the first six months of the year.

Assuming Italy issued all new BTP bonds at 6 percent over the next four years, ING fixed-income strategist Alessandro Giansanti estimated this would add 18 billion euros to its interest payments by the end of 2015.