Rome: Italy’s government will revise down its forecast for the economy this year to a contraction of less than 2 per cent when it updates its economic targets in September, new economy minister Vittorio Grilli said in a newspaper interview published on Sunday.

The government had previously forecast the economy would shrink 1.2 per cent this year. Its new forecast is close to the Bank of Italy’s estimate of a 2.0 per cent contraction but more optimistic than the employers’ lobby Confindustria’s prediction of a contraction of more than 2.4 per cent.

Grilli, 55, who took over the economy portfolio from Prime Minister Mario Monti on Wednesday, served as director-general of the Treasury under former Economy Minister Giulio Tremonti for many years.

He said the Italian government was wrestling with the question of how to reduce its debt. Italy’s borrowing costs were still too high, he said, but short-term rates had fallen from a year ago when financial market pressure eventually led to the toppling of former Prime Minister Silvio Berlusconi’s government last autumn.

“A year ago, our short-term yields were higher than long term, a sign that Italy was being closed out of debt markets,” he said in an interview with the Corriere dell Sera newspaper on Sunday.

“Now, the situation is the other way around. Short-term rates have fallen below long-term rates. But they are still too high.”

Italy currently pays 85 billion euros (Dh382.5 billion) per year to service its debt at an interest rate of 5.8 per cent.

Ten-year yields crept higher on Friday after Moody’s unexpectedly downgraded Italy’s credit rating by two notches to Baa2, putting further pressure on the country which has introduced sweeping austerity measures to try and tackle its high debt.

Grilli said markets had not yet recognised the full effect of the government’s deficit-reduction measures and structural changes to labour and pension laws. He said that 40 per cent of Italy’s debt is in foreign hands.

He was optimistic that the European Union would succeed in agreeing on what Italians call an “anti-spread shield”.

Monti said last week that Italy may want to tap Eurozone aid to ease its borrowing costs.

The closer political and fiscal union needed to make the European Financial Stability Facility and the European Stability mechanism work smoothly will eventually receive backing by all European partners as the benefits become clearer to all, he said.

Debt reduction

The Italian government is wrestling with the question of how to reduce its debt, he said.

Grilli said in the interview that “most feasible path” to debt reduction is a multi-year plan to reduce Italy’s debt pile, which equals 123 per cent of GDP, by selling state assets gradually year by year, bringing in 15-20 billion euros a year.

He noted that the best state assets had already been sold in a series of massive state asset sales over the past 20 years.

Grilli said however that the creation of a holding company for controlling state-owned real estate as well as two other funds (one of which holds municipal utilities) was a good start.