Peru Cabinet Crumbles, Changes Seen on Friday Thu Jul 11, 1:03 PM ET
By Jude Webber
LIMA, Peru (Reuters) - Peru's economy and prime ministers -- both darlings of Wall Street -- said on Thursday they were leaving the unpopular year-old government of President Alejandro Toledo in a sweeping reshuffle designed to inject new life into the stuttering administration.
Toledo, whose popularity is down to less than 16 percent, is struggling with a crisis of credibility after failing to deliver on promises of more jobs and wealth in this Andean nation, where millions live on little more than $1 a day.
Toledo is expected to unveil his new team on Friday, ahead of his first anniversary in office on July 28, in a bid to give his fractious Peru Posible party more clout and build bridges with the opposition.
The exit of Kuczynski, a relaxed, tennis- and flute-playing former fund manager, is expected to hand the herculean task of balancing Peru's budget back to his predecessor, Javier Silva Ruete, who had the job for eight months in 2000-2001.
The key question is what will happen to Peru's economic policy. Kuczynski's privatization and austerity programs had made him one of Toledo's least-loved ministers, but the new incumbent will have little room for maneuver in seeking to plug a budget deficit without much cash.
Peru, Latin America's No. 7 economy, is desperate for a good name abroad to attract foreign investment after a government corruption scandal erupted in late 2000, felling then-President Alberto Fujimori ( news - web sites) and spooking markets.
Peru's country risk -- the spread of its bonds over U.S. treasuries -- widened 35 basis points to 726 basis points, as nervous investors waited for news of who would take over.
"The more important issue is whether the resignation of Pedro Pablo Kuczynski, along with so many other Cabinet members, marks a change of economic course for President Toledo," said Christian Stracke, head of emerging markets strategy at Wall Street research firm CreditSights.
"Peru's fundamentals ... are none too encouraging."
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Danino, who left his job as a high-flying Washington lawyer, is widely expected to be replaced by Luis Solari, a doctor and former health minister.
Solari is a senior Peru Posible figure who analysts say should be able to bring the government closer to its party in Congress, with whom it has often been at odds.
Toledo has also been hunting for a new foreign minister after Diego Garcia Sayan quit earlier this week. Media reports have tipped Peru's ambassador in Washington, Allan Wagner, for that post, or perhaps for the job of prime minister.
Wagner served as foreign minister during ex-President Alan Garcia's 1985-90 term, and his appointment would be seen as an overture to Garcia's American Popular Revolutionary Party, the main opposition force.
Analysts say Toledo -- a former business school professor untested in public office until his election last year -- lacks direction; peace with APRA could help steady his rocky ship.
Ministers say they also expect changes in the transport, women's and energy portfolios.
Kuczynski, who said he was leaving happy to have steered Peru into growth but sad at not having achieved all his aims.
"The president explained to me yesterday that he wants a more political cabinet and this is the reason for my exit," Kuczynski told RPP radio.
Pablo Secado, economist at the Peruvian Institute of Applied Economics, said the change of Kuczynski "is clearly going to give political oxygen to the government."
Peru is pushing for growth of 3.5 to 4 percent this year, after just 0.2 percent last year, and a budget deficit of up to 2.2 percent of gross domestic product. But a privatization program that was the cornerstone of Kuczynski's policy ran into trouble with violent protests in June and is now practically on ice -- and with it, Peru's revenue raising plans.