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A new government for Greece, but no new austerity deal

Chris Ratcliffe/Bloomberg

Greece formed a government three days after a cliff-hanger election and immediately vowed to resurrect the dying economy, but Germany is already sending out powerful signals that the growth-crunching austerity programs are here to stay.

Antonis Samaras, who was sworn in Wednesday as Greece's third Prime Minister since November, said Athens will stay inside the 17-country euro zone and implement the broad terms of Greece's second bailout, worth €174-billion ($225-billion). The emergency loans were offered to the previous government in exchange for a harsh package of spending cuts, tax hikes and structural reforms.

"Tomorrow I will ask the new cabinet to work hard to produce tangible results that will take us out of the crisis," he said.

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Mr. Samaras is the leader of the centre-right New Democracy party that took the most votes – about 30 per cent – among the 20 parties that went to the polls. That was not enough to give him a majority in the 300-seat parliament, despite a 50-seat "top-up" automatically awarded to the front runner party.

To govern, New Democracy forged an alliance with the socialist Pasok party and the small Democratic Left party, an alliance that will give the coalition 179 seats. Despite having a comfortable majority, the new government will face strong opposition from Syriza, the radical left party that placed a close second in the election and pledged to abandon the bailout-for-austerity agreements, which it said were killing the economy.

Greece has been in recession for five years and is on the verge of an outright depression as the cash-strapped private sector falls apart and bank customers withdraw funds from their deposit accounts, for fear that Greece will not honour deposit-insurance schemes or will abandon the euro and reprint the drachma.

While Mr. Samaras has pledged to renegotiate the bailout terms to blunt its sharpest edges, his chances of success already appear remote.

"They'll make some cosmetic changes like lengthening out the implementation of the reforms, but what incentive is there for the troika [the European Union, the International Monetary Fund and the European Central Bank] to be flexible when the incoming government is effectively the same one that agreed to the original terms?" said strategist Marshall Auerback of Toronto's Pinetree Capital.

New Democracy and Pasok, the parties that have traditionally ruled Greece since the ouster of the military junta in 1974, supported Greece's twin bailout programs, meaning they lack the moral authority to attempt to dilute them substantially. Syriza, however, was prepared to play chicken with the troika, gambling that the threat of a chaotic Greek exodus from the euro zone, which might have triggered a run on banks in Italy and Spain and other ailing euro zone countries, would have led to a meaningful austerity compromise.

While some EU and euro zone officials seem willing to cut Greece some slack, Germany, which exerts enormous influence over the bailout programs and the ECB, has not opened the door to anything other than a few tweaks. Speaking on the sidelines of Mexico's Group of 20 summit earlier this week, German Chancellor Angela Merkel said "the new [Greek] government must stick to its commitments."

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In an interview with Germany's Spiegel Online, Volker Kauder, the floor leader of Ms. Merkel's conservatives, strongly hinted that Germany was losing patience with Greece's slow-motion reform effort, made worse by two elections since May, and would deliver no rewards to the new government. He said Germany would not "send any signal" that the agreed austerity measures would be diluted.

He also suggested that allowing Greece to renegotiate would trigger requests for similar treatment from the other bailed-out countries. "The Irish and the Portuguese can't come and demand to renegotiate as well," he said. "Agreements have to be adhered to."

Still, the coalition will try to renegotiate the package. At minimum, it hopes to secure a two-year extension to the medium-term reform package, between 2014 and 2016, that would demand spending reductions of almost €12-billion.

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