Greek bailout hopes renewed

Hopes for a resolution of Greece's debt impasse appeared to increase Friday, after prime minister George Papandreou replaced his finance minister and Germany softened its position on giving Greece more help.

The euro rose 0.7 per cent to $1.4305 US late in the day in New York and Greek shares rose five per cent.

Papandreou met the demands of critics within his own Socialist party by replacing his finance minister Friday in a broad cabinet shuffle.

Papandreou appointed Evangelos Venizelos, who challenged Papandreou for the party leadership four years ago, to replace George Papaconstantinou, who became widely unpopular as he imposed budget cuts and tax hikes as part of last year's $153-billion international bailout deal.

The shuffle raised optimism that the government will now be able to get its new program of tax hikes and spending cuts through parliament.

That is crucial to the country qualifying for its next round of bailout funds, worth $39 billion Cdn.

The changes followed two days of political chaos that threatened to bring down the government, leaving the country teetering towards default.

A default has the potential to spread the debt contagion, by weakening large European banks which have substantial Greek lending on their balance sheets.

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.

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."

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

Socialist dissenters have given no indication they will vote against the government in that vote late Tuesday, but one rebel said he would not back new austerity measures without "major changes."

If the government clears Tuesday's hurdle, then there appears to be a greater chance that Greece will get a second bailout after Germany's Merkel agreed with French President Nicolas Sarkozy that private investors should be part of the solution but that their participation had to be on a "voluntary" basis.

That was interpreted as somewhat of a climbdown by Merkel.

"As of last night, there were two main obstacles to sealing a package for Greece: disagreement among European policymakers, and Greek politics," said Nicola Mai, an analyst at JPMorgan.

"Following a meeting between Merkel and Sarkozy this morning, the first of these two obstacles appears to have been lifted."

Should the pieces all fall into place, the government has promised to slash its bloated public service by 150,000 people by 2015 two years beyond its current term and effectively end government jobs for life. The privatization program will also have to kick up a gear or two, particularly in the energy sector, which will now be overseen by former finance chief Papaconstantinou.

After the meeting with Sarkozy, Merkel indicated she now favoured a so-called "Vienna-style" agreement, which had previously received support from the ECB and France.

Participation would be voluntary

Under such a deal, banks and other private investors would commit to maintaining their exposure to Greece by buying new bonds as old ones expire and keeping their Greek banking subsidiaries afloat.

That type of bond rollover would likely have to come with some tweaks, as market interest rates on Greek bonds are currently way above what the Greek state could afford.

"It is about a voluntary participation of the private sector, and for that the 'Vienna-style,' as it is called, is a good basis and I think that we can use it to move forward," Merkel told reporters.

Sarkozy said "relatively precise principles" for the private-sector involvement would now have to be fixed, adding that "this can be put into place relatively quickly."

Merkel also ruled out the idea of triggering anything that could be counted as a default. "We do not want that," she stressed. "This is about a voluntary participation."

European finance ministers meet Sunday and Monday to discuss the crisis.