A small and apparently innocuous £250m bond issue by the Italian government last month raised a behind-the-scenes outcry that left treasury officials in Rome fuming.
The issue, arranged by UBS and Merrill Lynch, did not go according to plan the government failed to place all the sterling-denominated 30-year bonds.
The timing of the bond sale was challenging as Italy's credit rating had been downgraded by Standard & Poor's to Double A minus just a week earlier. This made investors call for a slightly higher rate of interest than the arranging banks expected, leaving some of the bonds with the underwriters.
In financial terms, the sale was insignificant Italy is the eurozone's biggest borrower and is expected to issue €199.6bn in debt this year, according to UBS. It is also not uncommon that the arranging banks end up with a small proportion of a new bond placement on their books in the notoriously selective UK market. All the same, news of the syndicate's failure to fully place the bonds left national pride smarting.
Governments represent the world's biggest borrowers, and their debt issuance is growing as increasing spending and flagging revenues leave budgets stretched.
This makes them valuable clients to investment banks, which arrange syndicated bond issues on their behalf. Banks have so far this year earned a net $84.6m from Italy's syndicated bonds alone, up from last year's total of $78.6m, according to Dealogic.
Although governments sell most of their domestic debt through auctions, the use of bank syndications has become more common in the integrated European Union as it gives borrowers access to a wider pool of investors, helping them to save in borrowing costs over the longer term.
Syndications also allow governments to target specific types of investors when issuing more exotic paper, like foreign-currency bonds.
But governments are tricky customers who jealously guard their reputations as borrowers.
Nerves at the Italian treasury were already frayed when the sterling issue took place because of the rating downgrade. The placement had probably been planned for some time and it was important for the treasury to demonstrate its borrowing prowess was intact.
The downgrade did not come as a big surprise, since S&P had repeatedly warned Italy that unless it cut its swelling budget spending with long-term measures, its creditworthiness would suffer. But it came at a particularly bad time just days after the ousting of Giulio Tremonti as finance minister, which had left the treasury in flux just as officials were feverishly working on a four-year economic programme.
A high credit rating is not only a question of prestige but also an important factor in minimising borrowing costs. With Italy already allocating about 12 per cent of all expenditure on servicing debt, according to Fitch Ratings, it could ill afford a rise in interest payments.
According to the Centre for Economic Policy Research, in countries where debt exceeds gross domestic product, a 10 basis point rise in spreads lifts government outlays by more than 0.1 per cent of GDP. At 106 per cent of GDP, Italy's debt ratio is the eurozone's highest.
Italy has been a trend-setter in debt markets and the treasury is known as an innovative borrower that has been quick to embrace new products. Diversifying its issuance has helped the treasury tap into a wide pool of investors, allowing it to minimise interest payments.
But now the likes of Germany and France are also struggling with large budget deficits, forcingthem to cast their netswider.
Competition between eurozone governments, which determine their own fiscal policies in spite of jointly run monetary policy, is set to intensify further when interest rates rise.
So far, bond markets have ignored Italy's rating downgrade, leaving the yield spreads on Italian bonds over Germany stable.
But investors are likely to become more discerning when money becomes more expensive, which may draw more attention to balance sheets.
Rising interest rates also put pressure on investment banks' fees for arranging bond sales. In this environment, a call to an underwriting bank from the disgruntled finance minister of a big borrowing nation is very bad news indeed.