June 19, 2002

AREQUIPA, Peru (Reuters) - In a sign Peru's government was not out of trouble even after reaching a deal to defuse the worst crisis to hit President Alejandro Toledo, Interior Minister Fernando Rospigliosi quit on Wednesday, citing splits over the handling of protests in the south.

Rospigliosi announced his "irrevocable" decision three days after Toledo declared a 30-day state of emergency in Peru's second city, Arequipa. Some 1,700 troops and police were dispatched to quell protests by furious residents fearing layoffs after Toledo reneged on a pledge not to sell two power companies.

It was the first change to the Cabinet since Toledo -- at record lows in opinion polls -- took office last July.

His announcement came hours after Vice-President Raul Diez Canseco unveiled a deal with local leaders in Arequipa to halt the protests, which was greeted there with jubilation as a climbdown by the unpopular 11-month-old government.

"I present my irrevocable resignation ... As you know, I did not agree with the response to the events of the last few days. I told you and all the ministers," Rospigliosi said, reading a resignation letter to Toledo live on television.

Local leaders in Arequipa had complained about Rospigliosi, and Justice Minister Fernando Olivera. In a joint declaration agreed with government ministers after two days of talks, they had asked them to make a public apology.

Toledo's spokesman said it was not immediately clear who would replace Rospigliosi, but said no one else would quit.

Diez Canseco earlier announced the government had decided not to finalize the privatization of electricity companies Egasa and Egesur until a court had ruled whether it was valid.

Belgian company Tractebel, which won an auction for the two generating companies last Friday with a $167.4 million bid, said it had suspended the sale paperwork. The company is unit of French utility Suez .

Local leaders in Arequipa had challenged the legitimacy of the sale. The government says it will appeal if it is declared invalid, but will respect a final legal ruling.

Jeering protesters were replaced by cheering crowds in Arequipa after Diez Canseco announced the deal, which said the state of siege could be lifted "48 hours after the signing of this declaration if public order is restored."

One man died, another was brain dead, 200 were injured and there were damages worth $100 million from week-long trouble.

Local officials had been insisting that Toledo explain why he backtracked on a written pledge not to sell the companies.

"This is the first time a government has had to admit it was wrong and has apologized ... to Arequipa," Mayor Juan Manuel Guillen told thousands waving flags in the main square.

HEADACHES MOUNT FOR TOLEDO

Political analysts said part of the problem was that Toledo had pushed ahead with the sales ahead of regional elections in November that will devolve more power away from Lima. He is already expected to reshuffle his Cabinet next month.

Toledo, who signed a written pledge during campaigning for 2001 elections not to sell Egasa and Egesur, sent a message to Arequipa that fell short of an apology saying a fragile economy had meant he could not fulfill all campaign promises.

The protests had sparked a sympathy strike across southern Peru from the border with Chile to the border with Bolivia, including the tourist capital Cusco, on Wednesday, halting public transport and stranding tourists bound for the Inca citadel Machu Picchu or the picturesque Lake Titicaca.

Jose Cerritelli, analyst at Bear Stearns in New York, said markets could fret if they thought that other things in the economic plan may also be subject to changes, especially if they involve things that are unpopular."

The debacle is a bitter blow for Toledo, who promised privatizations "with a human face" and hopes to raise $800 million this year to plug the budget deficit and fund road, power, health and education projects in this poor nation.

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