Greek PM dumps finance chief to try to survive

ATHENS Fri Jun 17, 2011 3:50pm EDT

1 of 20. Protesters raise a Greek flag in front of parliament during a rally against austerity economic measures and corruption in Athens' Syntagma (Constitution) square June 17, 2011.

Credit: Reuters/John Kolesidis

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ATHENS (Reuters) - Greek Prime Minister George Papandreou dumped his finance minister on Friday in a reshuffle meant to stiffen resolve for harsh economic reforms and avoid a default that could cause global economic turmoil.

Papandreou picked the outgoing defense minister, Evangelos Venizelos, as the new finance chief, jettisoning George Papaconstantinou, architect of a belt-tightening program that has stoked violent unrest and a revolt in his Socialist Party.

The move seemed likely to buy time for the prime minister, but analysts said it could also weaken the austerity drive after Venizelos said he would try to reach an agreement with Greece's bailout lenders to let it soften the deeply painful reforms.

The European Union and International Monetary Fund have made a new bailout for Greece, estimated at 120 billion euros, conditional on Papandreou's five-year package of cuts and tax hikes worth 28 billion euros ($39.59 billion).

Greece's political upheaval and three weeks of protests have pounded markets and drawn criticism from other EU states, where policymakers have dithered over how best to keep funding Greece and forestall a disastrous "credit event."

EU officials lined up to urge Greek leaders to stop playing politics and get behind the reform plan, however painful. "This is no time for party politics, there is too much at stake," European Council President Herman Van Rompuy said.

RESOLVE

Analysts said the reshuffle was aimed primarily at quelling dissent in the Socialist Party (PASOK) by moving the unpopular Papaconstantinou and appointing Venizelos, a powerful political figure and the prime minister's top party rival.

But they said that while the cabinet was expected to approve headline figures agreed with the EU and IMF in the mid-term reforms package, they may look for wiggle room when it comes to passing laws to meet those targets.

Papandreou told the new cabinet they had the resolve to push through reforms and save the Greek economy.

But he added the new administration would try to focus more on supporting growth -- a difficult prospect for a country trying to cut its budget deficit -- and Venizelos said he would go to Brussels on Sunday to try to agree changes to the plan already approved by the ruling party in parliamentary committee.

"All the changes, as marginal as they may be, to the mid-term plan and the implementation law, serve social justice," Venizelos told Mega TV.

"Our fiscal targets can afterwards be served by other means if these means are accepted by our partners."

He gave no details, but his predecessor pledged this week to change the package to refrain from hiking heating fuel tax and raising the tax-free threshold for property.

Papaconstantinou becomes environment minister in the reshuffle. The new cabinet was sworn in by Orthodox priests in traditional robes on Friday and a confidence vote is due by Tuesday night.

The prime minister also removed the labor and environment ministers who had resisted some of the economic reforms. They were among 15 ministers or deputy ministers who were dumped.

Foreign investors were unimpressed by Papandreou's moves. The cost of insuring Greek debt against default hit a fresh record above 2,000 basis points on Friday before falling back after Germany and France said they were united behind a new aid package for Greece, including voluntary private sector participation.

Greek bank stocks surged after the cabinet deal, which is likely to restore political stability for the time being and ensure a successful confidence vote.

Venizelos is close to a party group unhappy with austerity plans, as is new Deputy Finance Minister Pantelis Oikonomou.

By bringing critics into the government, Papandreou may, at least for now, have deflated a party revolt that led three Socialist deputies to resign this week.

Oikonomou, previously an outspoken critic of the bailout, said after the reshuffle that the government must succeed.

But it will make it no easier and perhaps more difficult to implement the reforms in the face of public anger.

"This buys Papandreou just a little time. By putting Oikonomou and Venizelos in government, he makes sure that the mid-term budget plan will pass. But this just delays his problems ... Those who are called to implement the mid-term budget plan believe less in it than Papaconstantinou," former Finance Minister Stefanos Manos told Reuters.

Eurasia Group European director Wolfango Piccoli predicted elections within months, saying Papandreou had been "severely, possibly permanently, damaged" by the battle over reforms.

Other analysts said the risk of a Greek default was increasing, despite the disastrous potential consequences.

SECOND BEST

Papandreou originally wanted Lucas Papademos, an internationally respected former deputy head of the European Central Bank, as finance minister, analysts said. He would have impressed markets more, but he turned down the job.

Venizelos, a PASOK heavyweight, has held several cabinet posts in the past including those of government spokesman, justice minister and development minister.

In 2007, he challenged Papandreou for the party leadership.

The government aims to pass the austerity package -- which also includes a plan to raise 50 billion euros by selling state assets -- this month and must then begin work on a new set of laws to implement it.

The street protests against the reforms, which include plans to raise 50 billion euros through privatizations, have combined with political infighting and euro zone indecision to spook international markets.

Analysts said even if the new government manages to win the confidence vote and pass the new reforms, the chances they would be able to effectively rein in a debt mountain of 340 billion euros -- 150 percent of Greece's annual output -- were diminishing.

"If the political and social problems continue to deepen, then market pressures for a more immediate resolution to the crisis will build," Capital Economics wrote in a note.

"And even if the pressures subside and some form of agreement can be reached next month, it seems very unlikely that this will amount to a decisive solution to Greece's fundamental economic and fiscal problems."

That was a reference to systemic corruption, tax evasion, red tape, lack of competitiveness and a bloated, debt-ridden public sector.

(Additional reporting by Lefteris Papadimos, Ingrid Melander; and Angeliki Koutantou, Carmel Crimmins in Dublin; writing by Barry Moody; editing by Mark Heinrich)

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