- Associated Press - Friday, June 17, 2011

ATHENS, Greece (AP) — Greek Prime Minister George Papandreou met the demands of his restive party by replacing his finance minister Friday in a broad cabinet reshuffle that won strong support from markets, optimistic that crucial austerity measures will now be passed.

After two days of political chaos that threatened to bring down the government, Germany also appeared ready to provide billions more in aid to carry the debt-ridden country through 2014, after Chancellor Angela Merkel indicated that the private sector would not be forced to share in the pain of a second bailout.

Together, the developments in Athens and Berlin boosted hopes Greece will get a second bailout and avoid a devastating debt default, which at one point on Wednesday seemed to be just weeks, if not days, away. Greek shares are up over 5 percent, while the euro has recovered much of the ground lost since Wednesday.

Investors have clearly breathed a sigh of relief that Papandreou’s reshuffle will be enough to get his party’s deputies to back fresh austerity proposals. Papandreou has struggled to garner support for a crucial new package of euro28 billion ($39.5 billion) in spending cuts and tax hikes demanded by the EU and IMF. The package must be voted through parliament if the country is to continue receiving funds from its bailout.

European Commission President Jose Manuel Barroso reminded Greece’s new ministers to make good on their country’s commitments.

“If Greece does its part, I think the European Union also has to do its part because it is in our joint, it is in our common interest,” he said in a statement. “It is critically important that the signals coming from Greece are clear about that.”

By promoting Evangelos Venizelos, who challenged Papandreou for the party leadership four years ago, to the finance ministry, the Prime Minister will hope he met demands of his deputies. On Thursday, at a dramatic seven-hour meeting Socialist lawmakers demanded that the prime minister remove inexperienced loyalists from the Cabinet and replace them with more experienced party veterans, mostly in their late-50s.

Venizelos, a 57-year-old constitutional law professor, is considered Papandreou’s main internal Socialist rival. A veteran of several ministries, he handled the run-up to Greece’s hosting of the Olympic Games in 2004 as culture minister, and has also held the justice, development and transport portfolios in the past.

He replaces George Papaconstantinou, who became broadly unpopular as he imposed budget cuts and tax hikes as part of last year’s euro110 billion international bailout deal.

Government portfolios were also redistributed to address demands for faster reform from Greece’s debt monitors at the European Union and International Monetary Fund. A new ministry for administrative reform was created to help scale back the country’s bloated public sector.

Other party heavyweights were also promoted at the expense of Papandreou loyalists in a bid to calm internal dissent and push through the new five-year austerity plan, due to be voted on in Parliament this month.

Dimitris Droutsas, a close friend of Papandreou, lost the foreign affairs portfolio — and any position in the new government, as did Tina Birbili, the outgoing environment minister. Droutsas was replaced by Stavros Lambrinidis, who heads Greece’s Socialists in the European Parliament.

The new cabinet was sworn in shortly after being named, and the new ministers were heading straight into a cabinet meeting with the prime minister.

Venizelos’ immediate task as finance minister is to get on top of budget slippages and setbacks in cost-cutting reforms as well as pushing ahead with a massive privatization drive worth euro50 billion ($70.5 billion). At the same time, he will have to negotiate a vital second bailout package with Greece’s frustrated international creditors.

All this though hinges on whether Papandreou’s new government wins a confidence vote in Parliament, likely in the early part of next week.

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