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PM to name new cabinet

Greek Prime Minister George Papandreou will name a new cabinet today to muster support for painful economic reforms, despite public unrest and a split in his party that could push the country closer to debt default.

world Updated: Jun 17, 2011 13:17 IST

Greek Prime Minister George Papandreou will name a new cabinet on Friday to muster support for painful economic reforms, despite public unrest and a split in his party that could push the country closer to debt default.

He is likely to jettison finance minister George Papaconstantinou, author of a belt-tightening programme that has fuelled public anger, national strikes and a violent demonstration this week on the steps of parliament.

Papandreou delayed announcement of the new team late on Thursday in what looked like a signal he was struggling to find a suitable person for the key financial post. The reshuffle will be announced at 9am (0600 GMT), the government said.

The political upheaval has pounded markets and drawn criticism from other European Union states, where policymakers dithered over how best to keep funding Greece and forestall a "credit event" that could cause global economic havoc.

China weighed in again on Friday, with vice foreign minister Fu Ying saying it was "vitally important" Europe sorted out its debt mess. China's central bank earlier this week said the European debt crisis could spread and worsen.

Chinese Premier Wen Jiabao visits Hungary, Britain and Germany late next week, with the European debt crisis expected to be high on his agenda. China has invested an estimated 25% of its $3.05 trillion foreign exchange reserves, the world's largest, in the euro.

Three deputies have quit from Papandreou's Socialist Party in as many days in protest at a five-year, 28 billion euro ($39.59 billion) austerity package that the European Union and International Monetary Fund have set as a condition for more aid.

Two of the three abandoned Papandreou on Thursday following a failed bid to form a ruling coalition with the conservative opposition, but they will be replaced with party loyalists, leaving his thin parliamentary majority intact.

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

Doubt over cutting debt
Analysts said even if the new government managed to win a confidence vote slated for Tuesday and passed the new reforms, chances they would be able to effectively rein in a 340 billion euro debt load 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."

World stocks hit a three-month low on Thursday, the euro fell into a one-month trough and safe haven German government bonds rose as concerns intensified that the lack of a deal on Greece's debt might trigger serious global market turmoil.

The euro fell 0.2% to around $1.4175 in early Asian trade on Friday, with markets largely unconvinced Greece can dodge a default without political stability in Athens.

The White House said it was monitoring the situation and that the Greek debt crisis was a headwind to the US economy.

In a statement intended to soothe markets, the European Union's top economic official, Olli Rehn, said he expected the EU and IMF to release a crucial 12 billion euro ($16.97 billion) loan tranche in early July to keep Athens afloat.

But in Athens' central Syntagma square, protests dragged into their third week in front of parliament.

"I believe it would be a good thing to exit the EU/IMF memorandum and return to the drachma. One thing is certain, these measures are not getting us anywhere, said 26-year-old Nicos Chrysanthopoulos, who is unemployed.