Opposition row hinders deal on Papademos-led coalition

Greece's Prime Minister George Papandreou holds an emergency cabinet meeting at the parliament in Athens November 8, 2011.

ATHENS (Reuters) - Greek party leaders labored on Tuesday to agree on a new unity coalition led by a former central banker, with the rest of the nation and the EU clamoring for an immediate deal to save the country's finances and end the chaos threatening the euro.

Two days after the left and right of Greek politics agreed in principle on an interim government, an internal row in the conservative ranks was hindering a deal to form a coalition led by former European Central Bank vice President Lucas Papademos.

Conservative leader Antonis Samaras directed his anger at the EU, which has demanded written assurances that the national unity government will push Greece's 130 billion-euro ($180 billion) bailout deal through parliament before calling early elections.

But political sources said some lawmakers in the opposition New Democracy party were accusing Samaras, their leader, of giving away too much, especially in performing a U-turn to accept austerity measures in the bailout package.

Greece badly needs the bailout to release emergency funds before December, when it faces bankruptcy if it cannot meet big debt repayments. By contrast, the European Union badly needs to settle the Greek problem fast to persuade markets it can handle another crisis brewing in the much bigger Italian economy.

The socialists of outgoing Prime Minister George Papandreou were quick to blame the conservatives for the lack of a deal.

"The problem is now New Democracy," said a socialist official, requesting anonymity. "There are internal objections to the party going back on so many of its positions."

INTERNAL DIVISIONS

Samaras had long argued that the spending cuts, tax rises and job losses imposed by the outgoing socialist government under orders from the EU and IMF had deepened Greece's crippling recession, now in its fourth year.

A New Democracy party source refused to accept the party was the main problem, but acknowledged internal divisions since Samaras staged his U-turn on the package last week, helping to open the way for Sunday's agreement in principle.

"Parts of New Democracy are causing trouble. Many party officials around Samaras don't like the way things are going," the source said on condition of anonymity.

These members were urging Samaras to take a hard line with Brussels over its demand for written undertakings.

European Economic and Monetary Affairs Commissioner Olli Rehn made the demand, exasperated by Greece's record of making promises on tackling its huge debt and budget deficit and then falling short of fulfilling them.

Rehn singled out a decision by Papandreou last week to call a referendum on the bailout, a vote which might have seen Greeks reject the package because of the austerity measures tied to it. Papandreou backed down, but was forced into agreeing to make way for the unity coalition.

Speaking after a meeting of euro zone finance ministers, Rehn said Greece had breached confidence with the EU by calling the referendum. Now Brussels needed undertakings to release even the next 8 billion-euro instalment of funding for Greece under its original bailout package, pulled together last year.

"This confidence needs to be mended," said Rehn. "Finance ministers of the euro area expect that there is ... a written commitment, a written confirmation of the commitment of a broad-based government of national unity."

A government source said the EU wanted Samaras to sign, along with the new prime minister, finance minister, central bank governor and outgoing Prime Minister George Papandreou.

Rehn drew a tart response from Samaras, under pressure from his own members.

Samaras hinted in a statement that he might not give any written assurances because his spoken word was enough. "It's a matter of national dignity ... I don't allow anybody to doubt my statements," he said.

EURO ENTRY

Earlier, optimism had prevailed and a socialist party source insisted progress was being on the coalition.

Papandreou told his cabinet he hoped to have the name of a new prime minister by Tuesday night, a government source said.

"Negotiations are being finalized with Papademos as PM," a party source, with knowledge of the talks, told Reuters. "They are going through the final details."

There was no word on whether Papademos, an economist who is well known in European capitals, would accept the job.

As national central bank governor, Papademos oversaw Greece's entry into the euro zone in 2002. Its current chaos has cast doubt over whether that membership will continue.

Greek media screamed for action. "A national unity government, right now," Ethnos daily said on its front page. "The country and society cannot endure this any more."

European Union politicians expressed their alarm in Brussels about how the debt crises in Greece and Italy are shaking international confidence.

"Europe is running dry on credibility and a solution to a high debt crisis must be lower debt. The responsibility for that falls with the country with high debt and that is obviously Greece and Italy," Swedish Finance Minister Anders Borg said.

If Greece pushes through its euro zone bailout, it will indeed lower its debt but not only by exercising budget discipline: the bailout envisages a bond swap which will halve the value of banks' holdings of Greek government debt.

"If this government doesn't work out, we are lost," said Panagiotis Dimitriadis, 80, a public sector pensioner.

(Additional reporting by Dina Kyriakidou, Renee Maltezou and Karolina Tagaris; Juliane von Reppert-Bismarck in Brussels; Paul Taylor in Paris; Writing by David Stamp; Editing by Andrew Roche)