Greece's New Democracy seeks bailout coalition

ATHENS (Reuters) - Greece's conservative leader began talks to form a government on Monday after winning an election that sets him the task of imposing punishing austerity measures in a near-bankrupt economy while containing rising social tensions.

New Democracy conservative leader Antonis Samaras was due to meet Evangelos Venizelos, the head of the Socialist PASOK party, at 11:00 a.m. EDT after he received a mandate to form a government from the president.

The once-mighty PASOK, now reduced to third place after the dramatic rise of the radical 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's narrow defeat of SYRIZA caused relief across the euro zone, where countries had said Greece's future in the single currency depended on its meeting conditions attached to a bailout, which SYRIZA had vowed to tear up.

If SYRIZA had won - and claimed the 50 extra seats in parliament for the party that placed first - it would have been impossible to form a government supporting the bailout.

European leaders viewed Samaras's victory as an aversion of catastrophe. But any relief in financial markets vanished within hours as a rally on Monday quickly reversed.

Samaras still wants a better deal from Europe. He said Greece would meet its bailout 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."

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

SYRIZA leader Alexis Tsipras again ruled out joining a pro-bailout coalition government.

Germany, the euro zone's paymaster, gave little sign it was willing accept more than minor changes to the timing of some targets in the 130 billion euro ($164 billion) rescue agreed with the European Union and International Monetary Fund.

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. A new government could face protests soon 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 scored strongly in the election, particularly among young voters, and party leader Tsipras, 37, promised to continue opposition to painful austerity measures.

"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."

The election was a rerun of a poll on May 6, which Samaras had forced by withdrawing support from a previous government, but which had left him with too few seats to form a cabinet and Greece in a state of political disarray. Sunday's victory appears to justify his gamble, at least for now.

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 an even more comfortable 179 seat majority.

"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 and equivalent Italian debt over 6 percent, showing that the euro zone crisis was intensifying.

The new government may get some help from peers in the 17-member euro zone, relieved Greece is not on course for a euro exit with incalculable consequences for the rest of the bloc.

However, European leaders 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 to last only for a few weeks without more aid.

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.

However, even if Athens 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 appeared buoyed by the election, declaring that it had shown Greeks rejected austerity and had given his party a strong mandate for opposition.

"We should not let that go to waste," he said on Monday.

His attitude has raised fears of a return to the anti-austerity protests that have seen buildings torched, marble paving stones smashed up and much of Athens plastered with 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 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.

(Additional reporting by Dina Kyriakidou and Karolina Tagaris, Writing by James Mackenzie; Editing by Peter Graff)

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