* Greek coalition talks collapse, second election set
* Spain, Italy bonds hit as Greek crisis jolts markets
* France's Hollande says debt reduction tied to growth plan
* German SPD won't back fiscal pact without growth measures
By Dina Kyriakidou and Paul Taylor
ATHENS/PARIS, May 15 Attempts to form a
government in Greece collapsed on Tuesday, jolting financial
markets at the prospect that leftists opposed to the terms of an
EU bailout could sweep to victory in a June election and tip the
euro zone deeper into crisis.
The turmoil in Athens sent shock waves around other troubled
members of the 17-nation European single currency area. The euro
slipped below $1.28, world stocks slid and Spanish and
Italian bond yields rose above the danger level of 6 percent as
investors scurried for shelter in safe haven German Bunds.
The tremors from Greece, compounding worries about Spain's
debt-laden banking system, ended any honeymoon for new French
President Francois Hollande, thrusting the growing risks to the
euro zone to the top of the agenda for his first meeting with
German Chancellor Angela Merkel hours after he took office.
In his inaugural address, the Socialist president called for
a European pact to revive growth and temper German-driven
austerity measures, seeking to change the direction of euro zone
"I will propose to our partners a pact that will tie the
necessary reduction of our public debt to the indispensable
stimulation of our economies," Hollande declared, saying Europe
needed "projects, solidarity and growth".
The French leader's aircraft was struck by lightning shortly
after takeoff from a military airport near Paris en route for
Berlin, forcing him to turn back and take a substitute plane.
In Athens, President Karolos Papoulias abandoned efforts to
broker a compromise on a cabinet of technocrats to steer the
country away from bankruptcy, nine days after an inconclusive
general election. A caretaker government will now be formed
pending a new vote probably in mid-June.
"We resisted in every way," said Alexis Tsipras, leader of
the hard-left SYRIZA party, which surged to second place in last
week's election on an anti-austerity platform and blocked any
deal with pro-bailout mainstream parties.
"We made the decision to not betray your hopes and your
expectations," said Tsipras, emboldened by opinion polls showing
his party could top the poll in a second vote. "Now it's time to
complete it: We will consign in the dustbin of history all the
spent forces of the past."
Euro zone finance ministers dismissed talk of Greece leaving
the single currency area as "propaganda and nonsense" on Monday.
But with hostility to EU/IMF-imposed austerity rising in Greece,
speculation about a possible state bankruptcy and euro exit is
rattling financial markets and won't go away.
IMF chief Christine Lagarde said it was important to be
technically prepared for the possibility of Greece leaving the
euro zone, warning that such a move would be "quite messy" with
risks to growth, trade and financial markets.
Finnish Prime Minister Jyrki Katainen openly discussed the
prospect, telling broadcaster MTV3: "If Greece were to leave the
euro it would probably not cause a significant financial crisis
that would have happened a couple of years ago.
"But on the other hand, we would have other problems. What
kind of impact would it have on European economic development,
on Spain's, Italy's econmies, would market begin to speculate
about other euro countries leaving? Naturally it would have an
impact on the stability of Greek society."
Averting an immediate default, Greece made a key payment to
bondholders who rejected an earlier debt exchange, a move likely
to upset the vast majority of creditors who accepted just cents
on the euro in a historic bond swap in March.
The outgoing government opted to pay 435 million euros ($552
million) of a May 15 bond to investors who had refused to
exchange their debt, despite having insisted that those who
rejected the swap would get nothing.
Sworn in with all the pomp of the French Republic, Hollande
won support from Germany's opposition Social Democrats (SPD),
who vowed to use their parliamentary blocking power to delay
ratifying a European budget discipline treaty until Merkel
accepts accompanying measures to boost growth and jobs.
Hollande's inauguration with military honours, capped by an
open-topped motorcade ride up the Champs Elysees to the Arc de
Triomphe in a torrential downpour, marks a potential turning
point in the euro zone's debt crisis.
EU officials hope his election will revive proposals for
radical steps to overcome the debt crisis such as issuing joint
euro zone bonds, which Merkel has so far blocked.
Some policymakers believe it could also lead to heavily
indebted member states that are in the grip of a recession being
given more time to meet their EU budget balancing targets.
Markets and policymakers are watching the dialogue between
the conservative German chancellor and the centre-left French
leader for signs that they can overcome their differences on
Merkel's drive for austerity and lead the euro zone together.
In Berlin, the Social Democrats, invigorated by their
victory over Merkel's Christian Democrats (CDU) in a major
regional election on Sunday, said growth measures must go beyond
the structural economic reforms advocated by the chancellor.
"That is not our definition of growth nor that of the
Socialists in France," said SPD Chairman Sigmar Gabriel.
A senior Merkel ally, CDU parliamentary whip Peter Altmaier,
said that while he expected no concrete decisions to be taken at
the first Merkel-Hollande meeting, he was confident the euro
zone's two most powerful economies would reach a joint position
on growth measures in time for an EU summit next month.
"It is important that we study each others' proposals. But I
am sure that we will be able to agree a common Franco-German
approach by the end of June at the latest," Altmaier told
Reuters in an interview.
Despite the SPD's threat, Altmaier said he expected the
German parliament to approve the European fiscal compact before
the summer recess, which requires some opposition votes to
provide the necessary two-thirds majority.
"HOMER" AFTER "MERKOZY"?
Merkel and former French President Nicolas Sarkozy, who left
office on Tuesday, had dominated euro zone crisis management
since the debt turmoil began in late 2009, earning the nickname
"Merkozy" for their sometimes disputed leadership.
Her relationship with Hollande, which one French pundit has
already dubbed "Homer" perhaps due to its Greek challenge, may
initially be cool as they are from opposing political families.
But the chancellor has promised to welcome the Socialist
"with open arms" and the two calm, methodical leaders may be
better suited temperamentally than the calculating Merkel and
the impetuous, hyperactive Sarkozy.
Hollande has said he will press Berlin to lift its veto on
issuing common euro zone bonds to harmonise borrowing costs
within the currency area, or to allow the European Central Bank
to lend directly to governments.
Both ideas are "red lines" for the centre-right German
government, although Merkel has not ruled out euro zone bonds as
a long-term prospect if Europe takes more steps towards a
tighter political and fiscal union.
Surprisingly strong first quarter growth figures for Germany
relieved pressure on shares and the single currency on Tuesday,
but worries about the deepening impact of the euro area crisis
and a possible Greek exit kept demand for safe-haven assets
The German economy grew 0.5 percent in the first three
months of the year, well ahead of forecasts due to a big rise in
exports, but weakness elsewhere in the region meant the euro
zone stagnated in the first quarter.