Greek leaders seek coalition, want to ease bailout

ATHENS (Reuters) - Greece's conservative leader pushed on Monday for a new coalition government after a narrow election victory, pledging to soften the debt-laden country's punishing austerity program despite opposition from Germany.

A brief relief rally on international financial markets after Sunday's Greek vote quickly fizzled out as it became clear that Antonis Samaras's New Democracy had failed to win a convincing popular mandate to implement the deep spending cuts and tax increases demanded by the European Union and the IMF.

Radical left-wing bloc SYRIZA and a host of smaller parties opposed to the punishing conditions attached to the 130 billion euro ($164.12 billion) bailout won around half the votes cast, though fewer seats because the electoral system rewards the first placed party disproportionately.

Samaras received a mandate to form a coalition government from the president on Monday, but talks looked set to run into at least Tuesday. He said the country would meet its commitments under a bailout saving the country from bankruptcy and a dramatic exit from the euro zone.

But Samaras added: "We will simultaneously have to make some necessary amendments to the bailout agreement, in order to relieve the people of crippling unemployment and huge hardships."

Samaras met with SYRIZA's charismatic leader Alexis Tsipras, who ruled out joining the government, and with the third-placed PASOK Socialists, who did not commit. PASOK leader Evangelos Venizelos said negotiations "must be wrapped up" on Tuesday.

The small Democratic Left party indicated it would be ready to support Samaras if the bailout deal could be softened.

Greece's economy is forecast to contract 5 percent this year after shrinking 7 percent last year. Protests regularly choke the centre of Athens, some hospitals are running short of medicines, thousands of businesses have closed and beggars and rough sleepers are multiplying.

During the election campaign, Samaras called for cuts in taxes, hikes in unemployment benefits, pension rises and two more years to meet fiscal targets.

But Germany, already irritated at what it sees as the slow pace of Greek reform, ruled out more than minor delays to some targets in the rescue package - Greece's second since 2010.

Chancellor Angela Merkel, speaking at a meeting of G20 leaders in Mexico, said any loosening of Greece's agreed reform pledges would be unacceptable and reiterated that Athens had to stick to the commitments it had already made.

GERMANY SAYS DEAL "NOT NEGOTIABLE"

Samaras voted in 2010 against the first 110 billion euro rescue because he thought it was too harsh. He now says Greece should have until 2016, not 2014, to meet fiscal targets set by under the bailout. Venizelos wants a further year to reform.

German Foreign Minister Guido Westerwelle said the substance of the bailout agreement was "not negotiable", but he said creditors might be willing to offer some flexibility on timing for some of the targets, given the time lost in campaigning.

"We're ready to talk about the time frame as we can't ignore the lost weeks, and we don't want people to suffer because of that," he told German radio on Monday.

There was frustration in Berlin that Samaras had campaigned on a promise to renegotiate the bailout, given the scale of resistance among those stumping up the cash.

European Central Bank Executive Board member Joerg Asmussen warned that extending the 2014 deadline for Greece to cut its budget deficit to below three percent of GDP would mean fresh money for Athens.

"I can only generally point out that if one is pressing to shift fiscal targets, one should be so honest to also say that as long as a country is running a primary deficit, extending the fiscal targets will automatically mean that there will be an additional external financing need," Asmussen said.

With an emboldened SYRIZA bloc led by former communist student leader Tsipras at the head of a powerful opposition, the new government could face protests soon after taking office. SYRIZA almost doubled its share of the vote since a previous election on May 6, which produced stalemate.

"CRISIS POSTPONED"

A coalition that won only 40 percent of the vote would struggle to push through reforms in the face of deep public resentment of repeated rounds of tax hikes and pay and pension cuts.

With nearly 100 percent of ballots counted, New Democracy won 29.7 percent of the vote, ahead of SYRIZA on 27 percent and PASOK on 12.3 percent.

With New Democracy's 50-seat bonus for placing first, a theoretical New Democracy-PASOK alliance would have 162 seats in the 300-seat parliament. Adding the Democratic Left would give it a 179-seat majority.

At a meeting in Mexico of the Group of 20 world economic powers, dominated by Europe's unabated debt crisis, U.S. President Barack Obama said the Greek result showed a "positive prospect" for the formation of a government that could work well with Greece's international partners.

Other observers were less optimistic that the result would do anything more than buy time.

"The crisis has been postponed, not necessarily averted," said Theodore Couloumbis, political analyst and vice-president of Athens-based think-tank ELIAMEP.

"For this government to last it has to show results. You can't continue with 50 percent youth unemployment and a fifth straight year of recession," he said.

Markets were also skeptical. The FTSEurofirst 300 index rose 1.1 percent at the open but shed all those gains before two hours were up, as the underlying problems in the euro zone brought investors back to earth. The euro's rise also evaporated.

More worryingly, Italian and Spanish borrowing costs rose strongly with yields on Spain's 10-year bonds at dangerously high levels of over 7 percent and equivalent Italian debt over 6 percent, showing that the euro zone crisis was intensifying.

"The result showed people want the euro, but society remains divided. SYRIZA will be a militant opposition, possibly complicating the new government's efforts," a senior New Democracy official said on condition of anonymity.

"The new government must deliver a positive development soon - an easing of the bailout terms or a positive sign in the economy - or people will lose trust in a week."

($1 = 0.7921 euros)

(Additional reporting by Dina Kyriakidou and Karolina Tagaris in Athens and Gernot Heller in Los Cabos, Mexico, writing by James Mackenzie and Matt Robinson; Editing by Peter Graff and Michael Stott)

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