Mary Dejevsky in Berlin: He lost - so why is Schröder still smiling confidently?

So why was Mr Schröder still smiling yesterday and insisting he would remain Chancellor? One answer is that he is, deep down, the ultimate political gambler and he has nothing to lose by hanging tough.

Arithmetically, his party has been defeated and he has already lost the chancellorship; politically, however, he senses that there is still all to play for.

But it is unlikely to be stubbornness alone that is preventing him from conceding. Some pressure undoubtedly comes from his party. By exceeding expectations so spectacularly, largely thanks to his genius for campaigning, the SPD has political momentum on its side, even though it did not quite manage to win.

The SPD will be loath to sacrifice a leader who is clearly such an asset, which is what would happen if it agreed to become the junior partner in a "grand coalition" with Ms Merkel's centre right. It is worth the SPD holding out as long as possible for a better deal.

And a better deal is a realistic possibility. The peculiarity of the new Bundestag is that not only does neither of the bigger parties have a majority, but neither of the ideologically coherent coalitions have a majority either.

The SPD and the Greens between them may not have a majority, but the parties across the whole spectrum of the left do.

There are several ways in which Mr Schröder could remain chancellor. Two of them involve three-party coalitions: the "red-green" coalition could add either the FPD or the Left Party - and whatever any of the parties says in public, neither possibility can be completely excluded.

Mr Schröder's best chance of retaining power, however, may lie in complete stalemate. If neither he nor Ms Merkel can form a coalition, the President has to nominate a candidate for chancellor, whose name is then submitted to a secret vote in the Bundestag. The "left" composition of the new Bundestag makes it highly unlikely that Ms Merkel would win such a vote.

He might then proceed with a minority government, calling in support from the other parties as and when he needed it. To make this work would be the supreme political challenge, but it gives Mr Schröder every interest in a long game.

In fact, his game plan could, quite logically, be even longer. If the Bundestag fails to agree on a chancellor, the last resort is new elections. Given the ground the SPD made up against Ms Merkel, Mr Schroeder may feel his party could win a new election. With the knives out for Ms Merkel in her own party, it would go in divided, and possibly even with a new and untested candidate.