Papandreou vies to win support for cutbacks

ATHENS/BERLIN - Greek Prime Minister George Papandreou sacrificed his unpopular finance minister on Friday and put his main socialist party rival into the job in a bid to force through an austerity plan to avert bankruptcy.

The appointment, which analysts said was a second-best after Papandreou failed to persuade respected former European Central Bank vice-president Lucas Papademos to come aboard, came just before a crucial Franco-German summit to discuss future aid to Athens.

The elevation of Defense Minister Evangelos Venizelos to the finance ministry was aimed at securing party backing for crucial tax rises, spending cuts and sell-offs of public assets required for the EU and IMF to disburse emergency loans to keep Greece afloat next month and avoid a default which could unleash global financial turmoil.

Outgoing Finance Minister George Papaconstantinou, who negotiated a 110-billion-euro ($157 billion) bailout for Athens last year and had the confidence of international lenders and financial markets, was shunted aside to the environment ministry in a crisis-driven reshuffle.

"Venizelos is politically powerful and that might bode well for the implementation of fiscal consolidation, even though he has no track record in financial matters," UBS analyst Alexander Kyrtsis said.

Initial Greek market reaction was positive with bank shares rising by as much as 4 percent and the Athens stock market index up 2 percent.

But bond markets remain spooked by fears of a Greek default and most economists are overwhelmingly skeptical that Greece can ever repay its debt mountain, which has reached 340 billion euros ($484 billion) or 150 percent of the country's annual economic output.

Reuters' calculations based on 5-year credit default swap prices from Markit show an 81 percent probability of Greece eventually defaulting on its debt based on a 40 percent recovery rate.

In Berlin, German Chancellor Angela Merkel and French President Nicolas Sarkozy will try to overcome sharp differences on how to involve private investors in the second rescue plan without sparking carnage in financial markets.

A German minister said he expected them to strike a compromise after weeks of wrangling that has rattled markets.

"I believe the meeting today will yield a solution," German Deputy Foreign Minister Werner Hoyer told ZDF television. "I am sure they will come to a compromise."

The European Central Bank and European Commission have warned that any form of private sector involvement that causes a "credit event" or a downgrading of Greek debt to default status could wreak devastating damage to the eurozone.

Battered by strikes, protests and a string of resignations in his PASOK party, Papandreou has vowed to drive through his unpopular reform program for the sake of stability in Greece.

The political drama in Athens, where mass street protests turned violent and efforts to form a national unity government collapsed on Wednesday, and the splits in the EU continued to rattle bond markets on Friday.

The yield on 10-year Greek government bonds spiked to a record high of 18.9 percent just before the reshuffle was announced, and the cost of insuring Greek debt against default also hit a new all-time peak.

Reuters

(China Daily 06/18/2011 page8)