Italy faces harsher contraction this year as austerity kicks in

 
City A.M. Reporter
ITALY’S government will revise its forecasts to predict an even deeper recession, when it updates its official estimates in September, new economy minister Vittorio Grilli said in an interview published yesterday.

The government will forecast a contraction of just under 1.9 per cent in 2012, deeper than the 1.2 per cent previously forecast.

That brings it close to the Bank of Italy’s estimate of a two per cent contraction but more optimistic than the employers’ lobby Confindustria’s prediction of a contraction of more than 2.4 per cent.

Grilli 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.

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.

Grilli said in the interview that “most feasible path” to debt reduction is a multi-year plan to reduce Italy’s debt pile.