Toledo swears in minister

June 21, 2002

LIMA, Peru (Reuters) - The unpopular President Alejandro Toledo swore in a new interior minister on Friday and brushed aside rumors of a major Cabinet shake-up despite the loss of several top officials amid violent anti-privatization protests.

"These are difficult moments for Peru. ... But today we have a Cabinet that is more united than ever, that has overcome moments of crisis," Toledo told a news conference.

Toledo, whose popularity has slid to nearly 20 percent, swore in ex-Deputy Interior Minister Gino Costa as interior minister to replace Fernando Rospigliosi, who quit on Wednesday to protest the government's handling of the crisis.

Facing its worst crisis since taking power in July, the government signed a deal on Wednesday that ended seven days of anti-privatization protests in Peru's second largest city, Arequipa, by agreeing to put off the sale of two power firms until a court rules on its validity.

The protests over utilities Egasa and Egesur and the government's deal triggered several high-level resignations.

Hours after the deal was signed, Rospigliosi quit. The next day, Ricardo Vega Llona, head of the Pro-Investment agency that oversees privatizations, said he would resign. Deputy Justice Minister Pedro Cateriano also quit, according to justice ministry officials.

The government lifted a 30-day state of emergency put in place during the protests, said presidential spokesman Carlos Urrutia. The demonstrations had killed at least two people and temporarily shut down Arequipa.

The protests over the privatizations were the biggest challenge yet for Toledo, and prompted calls from opposition leader Lourdes Flores for the Cabinet to resign en masse. Analysts also warned that the events of the past week could damage a fragile investor outlook on Peru.

DANINO, KUCZYNSKI STAY PUT

Much of the shake-up talk centered on Prime Minister Roberto Danino, a former Washington lawyer seen as the peacemaker in Toledo's Cabinet. But Toledo was chummy with ministers on Friday and said he strongly supported the Cabinet.

Economy Minister Pedro Pablo Kuczynski, unpopular among many Peruvians but valued by Wall Street as a guarantor of fiscal discipline, said on Friday he wasn't about to leave.

"As long as my advisers and I believe we can keep doing our job in an orderly fashion, we will stay. ... There's no need for resignation fever," he told RPP radio. "But if (my team) sees that our work is tossed by the wayside, we won't stay."

Some analysts said Cabinet changes would wait until July 28, when Toledo will mark his one-year anniversary in office. It is also a day when Cabinet changes are traditionally made in Peru.

The protests in southern Peru were triggered by an unpopular plan to sell the power firms, which were won in an auction last week by Belgium's Tractebel, a unit of French utility Suez, with a $167.4 million bid.

That sale is one of the privatizations and concessions that the government is counting on to yield up to $800 million this year to fill government coffers and help Peru meet a 2002 fiscal deficit goal of 1.9 percent to 2.2 percent of gross domestic product.

But privatizations, which brought Peru $9 billion in the 1990s, are a thorny issue because many people fear funds will be wasted or that sales will bring rate hikes and layoffs.

Peru's country risk has climbed this week and was at 646 basis points on Friday on the JP Morgan Emerging Bond Index Plus. Wider spreads reflect the perception of increased risk as measured against safe-haven U.S. Treasury bonds.

JP Morgan said on Friday it had cut its allocation of Peruvian debt to underweight from neutral in its model emerging debt portfolio, citing political squabbles over privatization.

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