Analysis : Bruised Greek government to limp along, toughen stance with lenders

By Harry Papachristou

ATHENS | Tue Jun 25, 2013 10:23am EDT

(Reuters) - Greece's weakened coalition government is expected to survive the departure of a junior partner for now but will be forced to resist any fresh demands from its foreign lenders to prevent its tiny parliamentary majority from crumbling.

A year after coming to power, Prime Minister Antonis Samaras suffered a heavy blow when his smallest coalition partner, the Democratic Left, quit the government last week to protest the abrupt closure of state broadcaster ERT.

Left with a three-vote majority in the 300-seat parliament, Samaras rushed to appease his only remaining ally, PASOK, by giving the Socialist party key portfolios in a cabinet reshuffle and naming its chief, Evangelos Venizelos, as his deputy.

The new cabinet sworn in on Tuesday by Greece's archbishop has 11 PASOK members, including four full ministers. PASOK opted to have little say in the previous cabinet, which only included two PASOK-appointed technocrats in ministerial posts.

The more inclusive approach and PASOK's fear of new elections - in which the already battered party risks losing even more - means the two-party coalition is in some ways more stable than its three-party predecessor, analysts said.

That will allow the government to limp along for now, helped by the opposition of Greeks to a new round of elections that could throw the country into chaos and reopen fears of a Greek exit from the euro zone if the hard-left Syriza opposition won.

But few expect it to see out its four-year term ending in 2016 and the coalition could be pushed to breaking point in the autumn if lenders demand more austerity measures to meet budget targets under the country's EU/IMF bailout, analysts said.

"Most people don't want elections and therefore they are willing to tolerate an otherwise fragile government," Thomas Gerakis, head of the Marc pollsters, told Reuters.

"Their survival really depends on the whether they actually implement reforms without any serious trouble."

Teneo Intelligence, which assesses political risk, said a government collapse before year-end could not be ruled out.

REFORM HURDLES

A big test for the coalition will be to show it is on track to meet the target to fire 15,000 public sector employees by the end of 2014 and accelerate privatizations -- a process which has all but stalled.

Politically well-connected labor unions have already vowed to fight both and dock workers called for Wednesday a seven-hour nationwide walkout as a warning against the planned sale of the country's two biggest ports.

Despite naming the pro-reform Kyriakos Mitsotakis as administrative reform minister, Samaras will likely struggle to push through reforms that take on powerful special interest groups like lawyers or engineers with his 153-seat majority.

Four independents and some Democratic Left lawmakers have signaled they might back reforms to keep Greece in the euro, but their support is unlikely to come without strings attached.

Failure on that front could in turn trigger demands from the EU and IMF for additional austerity measures, which Samaras has ruled out to spare Greeks reeling from repeated rounds of pay cuts and a 27 percent jobless rate.

Instead, a new coalition agreement due for release soon is expected to reject new austerity measures and insist on pushing lenders for gradual tax cuts to help soften a severe recession in its sixth year.

Samaras said on Tuesday avoiding new austerity measures to fulfill targets in the country's international bailout was the priority.

"Our immediate priority is to return to recovery ahead of time, defeat unemployment, bring in investment, avoid new measures and create jobs for the youth," he told ministers at their first cabinet meeting.

TALKING TOUGH

Several coalition lawmakers have also signaled the government plans to toughen its stance with its lenders.

"The government will negotiate tough," Socialist deputy Costas Skandalidis told the Mega television channel, saying it will reject new wage cuts or tax hikes on low-income workers.

The government is already pressing the EU and IMF to repeal tax hikes on restaurants and fuel. It is also resisting any new tax rises or public sector wage cuts to offset a privatization revenue shortfall after failing to sell state gas firm DEPA.

"If this doesn't happen, the (bailout) program won't work," Skandalidis said, suggesting that the government could threaten the troika with elections if it doesn't get its way.

Another Socialist deputy, Panagiotis Rigas, went further, saying the government would leverage the IMF's admission earlier this month - that Greece's first bailout program in 2010-2012 was unnecessarily harsh - to seek better terms.

But with German Chancellor Angela Merkel keen to avoid a flare-up of trouble in Greece before she faces re-election in September, most analysts do not expect any serious clash with the EU/IMF troika before then.

Crunch time for the coalition is expected soon after, when Athens and its lenders will also have to decide how much in new savings Greece needs to drum up to meet fiscal targets for 2015 and 2016 - when it faces a 4 billion euro revenue gap.

"If new measures are required, then things will get tough for the government," said political analyst Costas Panagopoulos.

The opposition has also vowed to turn up the pressure come September, and says the government is already near collapse.

"This government is already running on empty, it's weak from the outset. It's the same two-party system that brought the country to the mess it's in today," said Panos Skourletis, spokesman for the Syriza party. "It's a short-term government."

(Additional reporting by Renee Maltezou, editing by Deepa Babington/Mike Peacock)