November 10, 2011 / 3:31 AM / 8 years ago

Greece PM to name crisis cabinet, euro zone shudders

ATHENS (Reuters) - Greece’s prime minister designate will name a new crisis cabinet Friday to roll out painful austerity measures and calm the political turmoil that has threatened to bankrupt Athens and force it out of the euro zone.

Greece’s two main parties agreed to make Lucas Papademos head of a new unity government Thursday, ending a chaotic search for a leader to save the country from default.

With a political battle raging in fellow euro member Italy over a similar national unity government, Papademos must now fulfill the terms of a 130 billion euro ($177 billion) bailout plan aimed at keeping Greece solvent.

He must also ease tension among the Mediterranean state’s political leaders, whose wrangling ahead of an election next year has repeatedly roiled global markets and drawn rebuke from the European Union.

A former European Central Bank policymaker, Papademos must sell off state-owned companies, tackle rampant tax evasion and start chipping away at a mountain of debt under a bailout plan agreed among euro zone leaders last month.

“The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence,” Papademos said Thursday.

Papademos was left working alone in his new prime ministerial office Thursday night after talks on the new government ended with no sign of an agreement.

Sources in the two parties — the ruling Socialists and the opposition New Democracy — said Evangelos Venizelos was likely to remain as finance minister when President Karolos Papoulias swears in the new cabinet, scheduled for 1200 GMT (7 a.m. EST) Friday.

Papademos’s appointment was welcomed by economists who said he was a safe pair of hands who was less likely to waver on tough decisions than politicians loathe to be known as supporters of austerity.

But the greying 64-year-old faces a struggle against a public that opposes more belt-tightening after years of public sector cuts and tax hikes that are expected to send the economy into a fourth straight year of recession in 2012.

His cabinet also faces a strike-happy public sector and two main parties that will likely distance themselves from tough measures as they jockey for position ahead of an election penciled in for February 19.

Incoming Prime Minister Lucas Papademos stands outside the Presidential palace after a meeting with Greek political leaders in Athens November 10, 2011. REUTERS/Yiorgos Karahalis


European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy hailed Papademos’s appointment but urged Greece to push on with tackling a debt load the Commission estimates at 162 percent of annual output this year.

That is far above the EU debt average of 85 percent of gross domestic product, as well as the 62 percent owed by Argentina when it fell into default in 2001.

“We have long stressed the need for a broad political consensus around measures to lift Greece out of this deep economic crisis. As such, we warmly welcome this news,” the two EU leaders said in a joint statement.

About 8,000 Communist party supporters marched past parliament Thursday night, chanting “no more austerity.”

Political tussles remain an issue. Sources say New Democracy leader Antonis Samaras nearly torpedoed the unity government agreement after Papademos demanded all parties enact a pledge to push through reforms agreed with Greece’s international lenders.

That followed a bizarre series of actions by outgoing Prime Minister George Papandreou, who called a referendum on the austerity measures he had already agreed with euro zone leaders before reversing the decision under a storm of protest from those same leaders.

He finally agreed to step down, but only after negotiating a face-saving confidence vote that allowed his party to negotiate a unity government while still in power.

Slideshow (5 Images)

Analysts said continued political wrangling would undermine Papademos’s efforts to meet Greece’s financial obligations.

“I can’t see the unions and the population willing to support an unelected technical government that is demanded by the European Union and even more so Germany,” said Chris Williamson, chief economist at market research firm Markit.

“There’s the danger that an interim technical government will not be able to implement policy purely because, down the road, there will be general elections and things will be reversed, so there is a great risk of a state of limbo.”

Reporting by Michael Winfrey; Editing by Andrew Heavens

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