Greek PM set for reshuffle as snap election looms

Greek Prime Minister Costas Karamanlis speaks during a news conference after the meeting with Albania's Prime Minister Sali Berisha in Tirana April 27, 2009.

ATHENS (Reuters) - Greek Prime Minister Costas Karamanlis is set to reshuffle his cabinet over the next few weeks to give a fresh coat of paint to a ruling party trailing its rival with a snap election looming.

Karamanlis, 52, swept to power in 2004 beating the socialists on a promise to clean up Greek politics, and was narrowly re-elected in 2007.

But scandals and unpopular economic measures, which have faced resistance in the courts or from within his conservative party, and which have done little to boost growth, have eroded support.

"A reshuffle must take place very soon in order to have impact," said Takis Theodorikakos, head of the GPO pollsters.

"It can be effective if it signals important changes in policy ... the government has not convinced people about the effectiveness of its economic policy."

The opposition socialist PASOK party has called for a snap election which the ruling New Democracy party, clinging to a one-seat parliamentary majority with 151 out of 300 seats, has rejected, saying a steady hand is needed now more than ever.

Struggling with a ballooning public debt and a stagnating economy, Greece is seen by inward investors as the euro zone periphery's riskiest bet.

Although an election would be disruptive during the current global downturn, foreign experts say a vote would not necessarily be bad news for the rating of Greece's debt, which saw its yield spread over benchmark German bunds hit record highs earlier this year.

"I don't think a cabinet reshuffle will affect the rating. In the case of a snap election, we would wait to see the outcome and if the opposition wins, wait for its first moves," said Chris Pryce from Fitch Ratings. "Provided the government does not spend to buy votes, then it should not be a problem."

An election is not required until autumn 2011, but is highly likely before then. The current president's term expires in March, and although largely a ceremonial post, two thirds of parliament are needed to elect a new one. A successful presidential vote will need the support of the socialists, who have made clear they will force a full parliamentary election.

"Mr. Karamanlis is a chess player who realizes he has no more moves to make," PASOK spokesman George Papaconstantinou told Reuters. "He has run out of time."

Analysts say Kramanlis may pick a moment in the autumn to call an election or that he may bide his time until spring, hoping to close the gap with PASOK as he drafts a tough 2010 budget in October.

He is set to signal his intentions during a speech in the northern city of Thessaloniki on September 5. In the meantime, he needs some new faces at the top, although the key finance and foreign ministers are not expected to be changed.

COALITION FUTURE?

In June's European Parliament election results New Democracy lost to PASOK with a 4.3 percentage point gap. That, translated into a national vote, would give victory to the socialists but not enough votes to rule alone. They say in this case they will hold a repeat election under a new electoral law that would allow them to form a government even if they win fewer votes.

Karamanlis for his part has ruled out cooperating with the far-right LAOS party in the event of losing his majority, but the temptation to stay in power could change that view.

A vote in the middle of the financial crisis would be disruptive, with the public sector effectively freezing up at a time when revenues have hit a record low and politicians are traditionally eager to splurge on securing votes, analysts say.

"The best scenario for the country, for the government and for the opposition is not to have an election before spring," Theodorikakos said.

Foreign experts see Greece's economy entering its first recession since 1993 this year, with tourism, shipping and construction taking a heavy hit. Debt, seen at 103.4 percent of GDP this year, is second only to Italy's in the euro zone.

PASOK has said, that should it win any snap election, it would re-draft the 2010 budget and go to Brussels to extend a deadline for bringing the deficit, seen by the EU at 5.1 percent of GDP in 2009, below its 3 percent limit for EU members.

"We will re-negotiate with the Commission for more time on the basis of a credible program that contains fiscal adjustment, social equity and public sector reforms," PASOK's Papaconstantinou said.

(Editing by Sonya Hepinstall)