Greece's New Democracy Seeks Bailout Coalition

The head of Greece's New Democracy party began talks to form a government on Monday after winning an election that sets him the daunting task of imposing punishing austerity measures in a near-bankrupt economy while containing rising social tensions.

Party leader Antonis Samaras was due to meet Evangelos Venizelos, the head of the Socialist PASOK party at 1500 GMT after he received a mandate to form a government from Greek President Karolos Papoulias.

The once-mighty PASOK, now reduced to third place after the dramatic rise of the leftist anti-bailout party SYRIZA, said it would support Samaras but had not yet decided whether to join the government or just offer parliamentary backing.

Samaras said Greece would fully meet its commitments but 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."

In deep recession, crushed under its huge public debt and forced to slash public spending and hike taxes repeatedly, Greece is struggling to restore its near-bankrupt economy, and a new government could face new protests after taking office.

"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.

SYRIZA, which had promised to tear up the bailout deal signed in March with the European Union and International Monetary Fund, scored strongly in the election, and party leader Alexis Tsipras promised to continue its opposition to the painful austerity measures demanded of Greece.

"I don't think anything good will come out of these elections," said Dinos Arabatzis, a 56 year-old taxi driver who voted for New Democracy.

"Whoever is in power now will get burned. Samaras will get burned, and Tsipras will come out much stronger if we go to elections again - that's what worries me," he said.

With nearly 100 percent of ballots counted in the election, a re-run of a poll on May 6 that left no party able to form a government, New Democracy had won 29.7 percent of the vote, ahead of SYRIZA on 27 percent, and PASOK on 12.3 percent.

A 50-seat bonus automatically given to the party that comes first would give a theoretical New Democracy-PASOK alliance 162 seats in the 300-seat parliament, enough for a majority broadly committed to the 130-billion-euro ($164 billion) bailout.

"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."

MARKET RELIEF EVAPORATES

In the markets, trust had an even shorter shelf life. Though the FTSEurofirst 300 index rose 1.1 percent at the open, the index had 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 with equivalent Italian debt over 6 percent.

PASOK officials told Reuters that a meeting on Monday would decide how they would support Samaras - whether by participating fully in government, or by voting with the coalition in parliament. The smaller, anti-bailout Democratic Left party was also due to decide on Monday whether it would back the conservatives.

The new government may get some help from euro zone peers, relieved that SYRIZA had not won and set Greece on course for a euro exit with incalculable consequences for the rest of the 17-member bloc.

However, they have offered no prospect of any major overhaul of the bailout agreement, which requires Greece to find 11.7 billion euros in spending cuts in June to qualify for the next loan installment.

Greece has enough funds only last for a few weeks without more aid but European partners have become deeply suspicious of the commitment of Greek politicians to implementing unpopular austerity measures.

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 timeframe 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.

However, even if it were granted some leeway, 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.

Despite his loss Tsipras, 37, appeared buoyed by the election and rejected calls to join an all-party unity government, saying his party was now the main opposition force and promising to fight the bailout package.

His attitude has raised fears of a return to the anti-austerity protests that have left parts of Athens scarred by angry graffiti and patrolled by squads of police in riot gear.

"Obviously I voted for SYRIZA so it could win, but the left is becoming stronger by the day and I'm happy about that," said Panagiotis Panagiotou, 55, a butcher in central Athens whose business has been hit by the crisis.

"SYRIZA will be a very powerful opposition party and when we have elections again - which we will - it will be even stronger, if not first."

Underlining the signs of potential instability, the ultra-nationalist Golden Dawn party took 18 seats, repeating its success of May 6 and confirming its status as a force in Greek politics, carried by an angry mood of public protest.