Greece, EU head for showdown over bailout pledge (Reuters)

ATHENS (Reuters) ? Greek conservatives set themselves on a collision course with the European Commission on Tuesday, refusing its request to sign a pledge to meet the terms of a bailout designed to save the country from bankruptcy and safeguard the euro zone.

Members of the New Democracy party, a key player in a Prime Minister Lucas Papademos's new crisis coalition government, said they would not bow to "dictates from Brussels" to give a written guarantee to honor the bailout.

The conflict bodes ill for the unity government, appointed last week to ensure Greece does what it takes to avoid default and end a domestic political spat that threatened its future in the euro.

The government is expected to sail through a confidence motion Wednesday with the support of bitter political rivals -- the Socialists of fallen prime minister George Papandreou, New Democracy and the far-right LAOS party -- which have joined forces in the national unity coalition.

Thursday, Athens will begin thrashing out a deal with private bondholders to slash its public debt, sources said, tackling a key pillar of a 130 billion euro bailout plan agreed with euro zone leaders last month.

But even before that package is finalized, the European Commission said the coalition must first commit to the deal in writing to secure an 8 billion euro loan from an earlier aid package that Athens needs to avoid bankruptcy next month.

New Democracy deputies Tuesday echoed party leader Antonis Samaras's earlier refusal to sign a pledge.

"You know very well that such a thing is against our constitution," Prokopis Pavlopoulos, New Democracy's constitutional expert, told parliament. "You also know that even ... EU law itself does not bestow any such powers on ... the European Commission to request such a thing."

New Democracy MP Nikos Dendias said his party would help Greece avoid disaster but rejected bowing to outside pressure.

"Dictates from Brussels cannot be a legitimate policy," he told parliament during a three-day confidence debate.

While in opposition during Papandreou's administration, Samaras repeatedly provoked the ire of the international community by refusing to back an IMF-prescribed austerity drive that has slashed public spending and pushed taxes higher.

Samaras says the policy mix is wrong, plunging Greece deeper into recession instead of taking it out of a debt crisis. Data Tuesday showed Greece's economy shrank 5.2 percent in the third quarter, sending Greek bank stocks 7 percent lower.

Economists predict a fifth year of recession next year and a total contraction of 15 percent from 2008 to 2012.

COLLISION COURSE

The European Commission Tuesday said euro zone leaders needed to see "a clear and unequivocal commitment."

"We expect this in writing. It has to be a letter and signed," Commission spokesman on economic and monetary affairs Amadeu Altafaj told reporters.

"It has to convince the European partners of Greece that there is strong commitment and that it will be followed by decisive action by all political forces, whatever happens in the future elections of Greece.

Analysts said one side or the other had to give.

"It could prove a stumbling block, especially if the EU Commission feels it's a sign that Greece is looking to wiggle out of various commitments," said Ben May, an economist at Capital Economics.

"But in the end it's in everyone's interest for progress to be made and to get the second bailout package, and some sort of compromise will be reached. A lot of this is posturing and one side will eventually give up."

Besides paving the way to meet the terms of the October bailout, Papademos, former vice president at the European Central Bank, must prepare for an election in the first quarter of next year, a year-and-a-half ahead of schedule.

In another sign of tension in the coalition, 101 members of Papandreou's Socialist party signed a petition opposing the party's cooperation with new Democracy and LAOS.

Polls show Papademos enjoys the support of three in four Greeks, but he faces a tough three months as his task is to implement painful tax rises and spending cuts and may have to pursue new steps if Greece misses more economic targets.

Ordinary Greeks hammered by waves of austerity as tax evasion and corruption persist have been disillusion with political parties.

Unions are considering nationwide strikes later this month when the budget comes to parliament.

Elsewhere in Europe, European shares and the euro fell as investors dumped Italian and Spanish bonds. French debt yields also rose on fear of the crisis seeping into core economies.

Papademos's office said he would travel to Brussels on Monday to meet EU officials, but a report that "troika" inspectors from the EU, the ECB and the International Monetary Fund would arrive this week had still not been confirmed.

BOND SWAP

Once the cabinet clears the confidence vote, Greek and EU negotiators will begin fleshing out a deal with the Institute of International Finance, which represents banks, over a deal that will stick private bondholders with a 50 percent loss and slash Greece's 330 billion euro debt load by a third.

"The aim is to have a conclusion soon on the final proposal that will be submitted to the private bondholders," a source at a major Greek bank who asked not to be named. "There is no specific deadline for this."

The source said the main task was to convince foreign banks who hold two-thirds of the bonds. Greek daily Kathimerini reported Tuesday Athens would propose that for every 100 euros Greece owes, bondholders would receive 10 to 20 euros in cash, depending on the maturities of the bonds they hold.

Banks are likely to propose that the face value of 141 billion euros of bonds be cut by 50 percent, Kathimerini said.

The remaining debt would be exchanged for bonds guaranteed by the euro zone's EFSF rescue fund and maturing in 22 years, with a fixed coupon of 7 percent or a floating-rate coupon of between 5.5 percent and 7.5 percent, the paper added.

An alternative proposal set out a 37 percent haircut on 65 billion euros of bonds, with the remaining to be swapped for new, 15-year bonds paying a coupon of 8 percent, it said.

Greece has been shut out of international markets for long-term financing for almost two years but occasionally taps the T-bill market. Tuesday it auctioned 1.3 billion euros of three month Treasury bills, paying 4.63 percent -- broadly unchanged from the last sale on October 18.

(Additional reporting by Philipp Halstrick in Frankfurt, Karolina Tagaris and Angeliki Koutantou in Athens; Writing by Ben Harding and Michael Winfrey; Editing by Andrew Heavens)

Source: http://us.rd.yahoo.com/dailynews/rss/world/*http%3A//news.yahoo.com/s/nm/20111115/wl_nm/us_greece

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