Mexican ruling party insiders fear embattled president a liability

By Dave Graham and Anahi Rama MEXICO CITY (Reuters) - Mexican ruling party lawmakers fear President Enrique Pena Nieto's lurch into scandal, weak economic record and struggle to tame corruption could hurt them in upcoming elections, raising pressure on him to take bold steps or shake up the cabinet. Pena Nieto's approval rating has slumped to as low as 25 percent since events began to spiral out of control with the September abduction and apparent massacre of 43 trainee teachers by corrupt police and a drug gang in southwest Mexico. Slow to respond to the crisis, Pena Nieto never visited the scene. He was then caught in a separate row over conflicts of interest when it emerged that he, his wife, and his finance minister had all bought or used homes built by a firm that has won millions of dollars in government contracts on his watch. "It shouldn't have happened," Patricio Flores, a lawmaker in the ruling Institutional Revolutionary Party (PRI), said tersely of the homes scandal even as he tried to deflect blame from Pena Nieto. "It's a fact that it's helped other parties." In public, PRI officials are reluctant to criticize their president, who insists he has broken no laws. But privately, many are exasperated at his handling of the crisis, which has hit support for the party ahead of mid-term legislative elections in June. Around two dozen PRI lawmakers and government officials consulted by Reuters said Pena Nieto needs to make a move to reassert his leadership, if necessary by removing trusted aides from his cabinet. Pena Nieto and his PRI lawmakers in Congress started well, working with the opposition to pass a string of reforms to overhaul the economy, culminating in an energy overhaul that ended Mexico's 75-year-old oil and gas monopoly. But Pena Nieto's ability to implement those reforms and make Mexico's economy more competitive will suffer if he cannot restore his credibility. "We can't carry on as before or we're going to lose the presidency," said one PRI federal lawmaker, speaking on condition of anonymity, with an eye on the next presidential election in 2018. As recently as November, the PRI was way ahead of its closest rival, the center-right National Action Party (PAN), according to polling firm Buendia & Laredo. It said the PRI then had 42 percent support, with the PAN back on 23 percent. By mid-February, the PRI had slipped to 30 percent while the PAN had risen to 26 percent. PRI lawmakers say their party would still have a comfortable lead were it not for the government blunders. The scandal over the homes rankles particularly. "It was a schoolboy error," said a veteran PRI politician. "Never has a president been this isolated." CABINET Officials say cabinet changes will come, and Pena Nieto made a start last Friday, pushing out Attorney General Jesus Murillo. Murillo had become a target of public frustration over the government's failure to clear up the case of the 43 students abducted by local police then handed over to cartel henchmen in the city of Iguala. Only one set of remains has been identified. "We have a serious problem perception-wise nationally about levels of government corruption," said PRI lawmaker Francisco Arroyo, deputy speaker of the lower house. Interior Minister Miguel Angel Osorio Chong is also under pressure over security lapses and for failing to contain months of protests by teachers. Still, in his favor, security forces have in the past week arrested two drug lords, Servando Gomez of the Knights Templar cartel and Zetas leader Omar Trevino. Both Osorio Chong and Finance Minister Luis Videgaray, whose stewardship of the economy has fallen short of expectations, have clouded Pena Nieto's judgment by painting too rosy a picture of the situation, one senior government official said. "They should both go," another PRI federal lawmaker said. Many PRI lawmakers see a replacement for Osorio Chong in Manlio Fabio Beltrones, the party's leader in the lower house and driving force of the legislative successes. Beltrones is out of a job when the current Congress ends this summer, and he is also eyeing the PRI party leadership. "The president still has the authority," said one PRI lawmaker. "But Beltrones has surpassed him in leadership." CORRUPTION Pena Nieto could make up ground if he can persuade voters he is serious about tackling corruption. But he was ridiculed last month when he announced an investigation into whether the homes linking him to the government contractor constituted a conflict of interest. Immediately afterwards, the official named to lead the probe said the homes would not be part of it. After killing off an earlier anti-corruption bill, the lower house last week finally approved a new initiative. It still needs Senate backing. Two former PRI state governors are already wanted in the United States on corruption charges, though they are not facing trial in Mexico. Two high-ranking government officials said they doubted Pena Nieto planned a major crackdown. "Everyone is too interconnected," a senior PRI official said. "If you have a corrupt former governor, the guy (governor) who's in power now is there because of what the one before did for him." Asked how Pena Nieto should respond to the challenges, and if more cabinet changes were needed, his spokesman Eduardo Sanchez pointed to government efforts to pass anti-corruption measures and said it would be speculation to comment further. (Editing by Simon Gardner and Kieran Murray)