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Greek PM dumps finance chief in bid to survive

Greek PM dumps finance chief in bid to survive
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First Published: Fri, Jun 17 2011. 07 55 PM IST
Updated: Fri, Jun 17 2011. 07 55 PM IST
Athens: Greek Prime Minister George Papandreou appointed a new finance minister on Friday in a crisis reshuffle to try to push through harsh economic reforms and avoid a default that could cause global economic turmoil.
Papandreou picked outgoing defence minister Evangelos Venizelos as new finance minister, jettisoning George Papaconstantinou, architect of a belt-tightening programme that has stoked violent unrest and a revolt in his Socialist Party.
The move seemed likely to buy time politically for the embattled prime minister but did little to dilute scepticism that Greece would be able to implement a new round of deeply painful reforms.
The European Union and International Monetary Fund have made a new bailout for Greece, estimated at €120 billion, conditional on Papandreou’s five-year package of cuts and tax hikes worth €28 billion ($39.59 billion).
The 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”.
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. Rather than giving new impetus to the reforms, analysts said, the reshuffle was aimed primarily at quelling dissent in the Socialist Party by moving the unpopular Papaconstantinou and appointing the prime minister’s main party rival Venizelos.
The prime minister also removed the labour and environment ministers who had resisted some of the economic reforms, among 15 ministers or deputy ministers who were dumped.
Markets, analysts unimpressed
The move failed to impress markets. 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 choked 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 ruling PASOK party 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 by selling state assets - this month and must then begin work on a new set of laws to implement it.
The protests against the reforms, which include plans to raise €50 billion through privatisations, 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- worth 150% 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.”
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First Published: Fri, Jun 17 2011. 07 55 PM IST