* Conservatives, Commission conflict on written pledge *
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 honour 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 on Wednesday with the support of bitter political rivals — the Pasok socialists of fallen prime minister George Papandreou, New Democracy and the far-right LAOS party.
On 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 bln euro bailout plan agreed with euro zone leaders last month.
But even before that package is finalised, the European Commission said the coalition must first commit to the deal in writing to secure an 8 bln euro loan from an earlier aid package that Athens needs to avoid bankruptcy next month.
New Democracy MPs on 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."
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 on Tuesday showed Greece's economy shrank 5.2% in the third quarter, sending Greek bank stocks 7% lower.
Economists predict a fifth year of recession next year and a total contraction of 15% from 2008 to 2012.
COLLISION COURSE
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 Pasok 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 disillusioned with political parties.
Unions are considering nationwide strikes later this month when the budget comes to parliament.
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% loss and slash Greece's 330 bln euro debt load by a third.
The main task was to convince foreign banks who hold two-thirds of the bonds. Greek daily Kathimerini reported on 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 bln euros of bonds be cut by 50%, 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% or a floating-rate coupon of between 5.5% and 7.5%, the paper added.
An alternative proposal set out a 37% haircut on 65 bln euros of bonds, with the remaining to be swapped for new, 15-year bonds paying a coupon of 8%, 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. On Tuesday it auctioned 1.3 bln euros of three month Treasury bills, paying 4.63% — broadly unchanged from the last sale on October 18.
