Greek PM reshuffle plan in doubt as deputies quit (Reuters)

ATHENS (Reuters) ? A string of parliamentary resignations on Thursday threatened to thwart Greek Prime Minister George Papandreou's plan to reshuffle his cabinet and pass austerity measures needed to save the nation from default.

The political turmoil raised uncertainty over the Socialist cabinet's five-year plan for tax hikes, spending cuts and state property selloffs demanded by its bailout lenders, spooking investors who fear the problems will infect global markets.

Analysts said it was increasingly unclear whether Papandreou would be able to form a new governing team and get the deeply unpopular measures approved amid the political chaos, which follows nationwide strikes and violent protests in Athens on Wednesday.

"It will be very hard now to find good people to form a government now. They don't trust (Papandreou) after all the flip-flops he has made," said former finance minister Stefanos Manos. "Who will make privatizations now in all this turmoil?"

Ruling party lawmakers will hold a caucus meeting of the parliamentary group on Thursday evening to debate the government's policies.

"We are not governing the country the way we should... We are going from depth to depth, from dilemma to dilemma," ruling party deputy Nikos Salayannis said outside parliament.

Two other Socialist deputies stepped down on Thursday in protest and will be replaced by other party members.

World stocks hit a three-month low, the euro tumbled and government bonds with top credit ratings rose as concerns intensified over the crisis, while the cost of insuring Greek debt against default hit yet another record high.

"This does nothing to reduce fears that some form of default will eventually take place," Ben May of Capital Economics said after the resignations.

The reshuffle reflects the unpopularity of the austerity measures and follows the failure of talks over a unity government on Wednesday that drew disappointment from European Union officials who have appealed for Greece's political elite to unite behind the belt-tightening.

Greek Finance Minister George Papaconstantinou said the party should remain stable ahead of the caucus meeting.

"There is only one goal for all of us: stability, to keep the country and the economy on its feet, to continue without interruption the financing of the country by its lenders," Papaconstantinou told reporters.

Prospects for a disastrous, disorderly outcome to the Greek crisis are beginning to show up on financial markets even though many investors still don't think it will happen.

BUYING TIME

The IMF will release the desperately needed next installment of aid for Greece in July, euro zone sources said. However, other sources said Germany, a major contributor to EU-funded bailouts, wants to postpone until September an EU agreement on a new 120 billion euro rescue program for Greece due to disputes over how to involve private creditors.

Reflecting growing international frustration at the lack of political will for reform in Greece, the European Commission warned that Athens must implement its program of austerity measures to keep receiving aid.

"The government and the political forces in Greece have to take the decisions, assume their responsibilities in order to support this program," Commission spokesman Amadeu Altafaj told a regular news briefing.

A senior IMF official said the Fund was deeply concerned by the political turmoil but was ready to help if Athens wins consent for the austerity plans.

If the reshuffle goes ahead, the new governing team will face a confidence vote late on Tuesday next week, a parliamentary aide told Reuters.

Papandreou may seek to replace Papaconstantinou, the main architect of hugely unpopular budget cuts demanded by the EU and the IMF as part of Greece's 110 billion-euro bailout last year.

Former ECB Vice-President Lucas Papademos is most frequently mentioned as a candidate to replace Papaconstantinou, who Greek media have said may be on his way to the Foreign Ministry.

Papademos's office said he was out of the country on Thursday and not available for comment.

AUSTERITY

Tax rises and spending cuts worth 6.5 billion euros ($9.4 billion) are planned this year, doubling already agreed measures that have driven unemployment up to a record 16.2 percent and extended a deep recession into its third year.

The EU and IMF have demanded the new 5-year austerity plan as a condition to release the next tranche of 12 billion euros in aid, which Athens partly needs to pay back debt that matures in August.

"I can't believe they are doing this (political wrangling), with all the money they are being offered," a European central banker told Reuters on condition of anonymity.

The plan includes new luxury taxes, a crackdown on tax evasion and higher taxes on soft drinks, swimming pools, restaurant bills and real estate. The euro zone member's 750,000-strong state workforce would be cut by a fifth. It also aims to raise 50 billion euros by selling off state-owned firms.

On Wednesday, tens of thousands of Greeks massed outside parliament to demonstrate their hostility to the draconian economic measures, while rioters threw petrol bombs at the Finance Ministry and police fired teargas to break up the crowds.

Opposition leader Antonis Samaras said the only way out of the crisis was early elections, but analysts said that would happen only if the government failed to get a vote of confidence.

"I think that Greek politicians are mature enough and will vote for the mid-term plan," said Gikas Hardouvelis, chief economist at EFG Eurobank. "What they don't have is the maturity to implement the hard austerity measures that it includes."

(Additional reporting by Tatiana Fragou, Renee Maltezou and George Georgiopoulos; Writing by Michael Winfrey and Hugh Lawson; editing by David Stamp)

Source: http://us.rd.yahoo.com/dailynews/rss/world/*http%3A//news.yahoo.com/s/nm/20110616/wl_nm/us_greece

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