New Greek coalition government agreed

Antonis Samaras, whose centre-right New Democracy party narrowly claimed first place in Sunday’s election, is expected to become prime minister.

The economist and former minister will assume an ambitious 24-month mandate to turn Greece’s recession-battered economy round before European parliament elections due in mid-2014.

The details of a cabinet were expected to be announced later on Wednesday. The three parties won 179 seats in the 300-member parliament.

Market relief at Sunday’s re-run election results faded almost instantly as worries turned to the rising borrowing costs of Spain and Italy.

But the other 16 members of the eurozone – whose finance ministers expect to welcome a new Greek counterpart to a meeting in Luxembourg on Thursday – are torn over how much leeway to allow the incoming government over the terms of Greece’s bailout.

Angela Merkel, the German chancellor, said on the sidelines of the Group of 20 summit in Mexico on Tuesday that “the new [Greek] government must stick to its commitments”. But other officials, including Jean-Claude Juncker, head of the group of eurozone finance ministers, urged more flexibility.

The far-reaching threat from Greece’s troubles and the broader eurozone crisis was highlighted on Wednesday when Japan posted its first-ever trade deficit with the EU.

However, Spanish yields – which move inversely to prices and reached levels seen as unsustainable earlier this week – fell on Wednesday after a leaked draft of the G20 communique showed a commitment from eurozone members of the G20 to lower the bloc’s borrowing costs. But they remained close to 7 per cent.

Mr Samaras clinched his deal after meetings with Evangelos Venizelos, leader of Pasok, and Fotis Kouvelis, chairman of the Democratic Left splinter group.

New Democracy won 129 seats at the election, including the 50 bonus seats awarded to the first-placed party under Greek election rules. It would have a narrow majority after adding Pasok’s 33 seats. The participation of Democratic Left with 17 seats is seen as important to fending off opposition by Syriza, the hard-left coalition that finished second with 71 seats on an anti-bailout platform.

Democratic Left, which has not previously been involved in power-sharing, would support the government in parliament but might decide not to contribute any cabinet ministers, a party official said.

Vassilis Rapanos, chairman of the National Bank of Greece, the country’s biggest commercial lender and a former director of the state economic think-tank KEPE, is the frontrunner to become finance minister, according to a conservative aide.

It is unclear whether Mr Samaras might accept a proposal by Mr Venizelos, to form a cross-party group headed by senior Greek economists to handle negotiations with the so-called troika – the European Union, International Monetary Fund and European Central Bank – on getting the bailout back on track.

Budget targets are off-track because of the delaying effect of back-to-back elections on revenue collection, government payments to suppliers and the implementation of the timetable for structural reforms.

The new government would be committed to the current bailout but would seek a two-year extension of a medium-term reform programme from 2014 to 2016.

The programme requires spending cuts of up to €11.7bn – equal to 5.5 per cent of national output – that were due to be approved by parliament last month.

Greece will argue for the extension on grounds of a deeper-than-expected recession. Takis Roumeliotis, until last year Greece’s top official at the IMF, said on Tuesday that the economy would shrink this year by as much as 7 per cent compared with earlier forecasts of 4.5-4.7 per cent.