ROME (Reuters) - Italy's government will revise down its forecast for the economy this year to a contraction of less than 2 percent 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 percent this year. Its new forecast is close to the Bank of Italy's estimate of a 2.0 percent contraction but more optimistic than the employers' lobby Confindustria's prediction of a contraction of more than 2.4 percent.
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 per year to service its debt at an interest rate of 5.8 percent.
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 recognized the full effect of the government's deficit-reduction measures and structural changes to labour and pension laws. He said that 40 percent 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 euro zone 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.
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 percent 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 f or controlling state-owned real estate as well as two other funds (one of which holds municipal utilities) was a good start.
The government wants to open up municipal utilities to private investment, he said.
The asset sales plan "would work out to a debt reduction of 20 percent in five years," he said.
Grilli said he hoped the government could cut taxes on labour costs with funds raised from an aggressive fight against Italy's rampant tax evasion - one of the Monti government's most visible policy initiatives in terms of immediate impact on Italians' daily lives.
"We'll get more than the 10 billion euros we budgeted" this year from the tax evasion crackdown, he said.
He said that the spending review currently under way to ferret out waste "will result in savings far beyond the numbers released recently."
Grilli also briefly discussed the Treasury's role as an investor. He said the goal of the state-owned fund Cassa Depositi e Prestiti was to "guarantee the development of communications and infrastructure networks like Terna, Snam and Metroweb..." as well as make strategic investments in small companies.
He said the government was observing developments at troubled defence company Finmeccanica SIFI.MI closely.
"We're watching it closely, transparency is vital in this case as well," he said.
Reporting By Jennifer Clark and Philip Pullella; Editing by Susan Fenton