Greece parties seal coalition deal, problems loom

ATHENS (Reuters) - Greece's traditional ruling parties agreed a coalition government on Wednesday and said they would form a team to renegotiate the punishing terms of a bailout that is staving off bankruptcy but fuelling rising social tensions.

The government brings together the conservative New Democracy party and Socialist PASOK in an uneasy alliance of rivals facing an emboldened opposition vehemently opposed to the austerity conditions attached to the country's financial lifeline.

Party leaders said a team would be formed to renegotiate the terms of the 130 billion euro ($164.79 billion) bailout, setting up a showdown with Greece's European partners who say they will tweak but not re-write the document.

"Our efforts have yielded a parliamentary majority to form a durable government," New Democracy leader Antonis Samaras told President Karolos Papoulias, three days after he narrowly won a Sunday election.

PASOK leader Evangelos Venizelos warned of a "big battle" in Brussels to craft a new deal that would promote growth and contain unemployment.

"The most critical issue is the formation of the national negotiation team and ensuring that it is successful," he told reporters.

PASOK will back the government in parliament but there was no word on who would serve in the new cabinet. Venizelos said the make-up of the government remained to be fixed and would be discussed by the evening.

The conservative-socialist alliance will also be backed by the small Democratic Left party, whose leader, Fotis Kouvelis, called on the government "to gradually disengage from the terms of the bailout that has bled society."

An official from one of the three parties in the coalition said that they had agreed to name National Bank Chairman Vassilis Rapanos as finance minister.

ARCH RIVALS

New Democracy narrowly beat the radical leftist Syriza bloc, which had vowed to scrap the withering terms of the bailout blamed for driving the country deeper into depression.

New Democracy and PASOK have little history of cooperation, having alternated office from the fall of military rule in 1974 until last year, when the economic crisis brewing under their watch forced them to share power in a short-lived national unity government.

They will face immediate pressure to try to soften the bitterly resented austerity measures demanded of Greece under bailout deal agreed in March with the European Union and International Monetary Fund, Greece's second since 2010.

At the same time Samaras must contain the rising social tensions created by the crisis and hold together a coalition in the face of Greece's most severe economic test since World War Two.

He inherits a nation facing its fifth year of a recession that has left one in five workers jobless, seen tens of thousands of businesses close and a growing number of homeless on the streets. The capital Athens is scarred by repeated bouts of violent protest.

Democratic Left party members endorsed a motion to back a coalition if a final agreement is reached, but according to party sources refused to place senior politicians in the cabinet, a move which potentially weakens their commitment to the new government.

PASOK, the former ruling party humbled in a May 6 inconclusive election and Sunday's re-run, may also stop short of sending senior leaders of its own to serve in the government.

Greek media reported that Venizelos had clashed angrily with other senior party leaders over his insistence that the Socialists should not put ministers of their own in a cabinet led by the right.

Both center-left parties could nominate technocrats from outside politics to serve in the cabinet but their reluctance to throw their own weight behind the new government may not augur well for the hard battles ahead.

"It will be a very weak coalition," said Nikos Konstandaras, managing editor of leading conservative daily Kathimerini, pointing to the decades of enmity between New Democracy and PASOK, the two traditional giants of Greek politics.

SUSPICIOUS

Germany, the euro zone's biggest economy, remains suspicious of Samaras, who switched from opposing the bailout when PASOK was in power to cautious endorsement when the Socialist government began to unravel late last year.

"What is needed is more decisiveness in swiftly implementing the measures which have already been agreed," German Finance Minister Wolfgang Schaeuble told the weekly Die Zeit in an interview.

However European Union officials have signaled that some adjustments are likely to a program that has slipped behind target in the weeks of political uncertainty following the May election and a deeper than expected recession.

With Greek society deeply split, a repeat of the violent anti-austerity protests seen last year is a constant threat.

Greek electoral law gives New Democracy a 50-seat bonus for coming first, so an alliance with PASOK would have 162 seats, a majority in the 300-seat parliament. Adding the Democratic Left would give it 179 seats.

Fast running out of money, the new government's first mission will be to convince officials from the so-called "troika" of European Union, European Central Bank and International Monetary Fund inspectors to sign off on the next installment of aid from the bailout.

Patching up funding gaps, gas supplier DEPA overcame a cash crunch with a 100 million euro bank loan to pay foreign suppliers and avert an imminent energy crisis, a company official said on Wednesday.

"The money was cashed in earlier today. It gives us a breather to pay for July and August deliveries," the official said on condition of anonymity.

But underlining the rising poverty levels which the new government will have to confront, hundreds of people turned up in Athens to a free distribution of fruit and vegetables by a farmers' association based on the island of Crete.

"Here we're seeing middle-class people that we never imagined we would see lining up like that," Athens mayor George Kaminis told Antenna TV. "But this is the reality." ($1 = 0.7889 euros)

(Additional reporting by Harry Papachristou, Tatiana Fargou, Karolina Tagaris, Greg Roumeliotis and Dina Kyriakidou; Writing by James Mackenzie and Matt Robinson; Editing by)

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