The timing of the move, which could take the form of a debt buyback or a voluntary change to the terms of Greek bonds, is designed to relieve pressure on Athens and take effect before most Greek debt passes into public sector hands.
Greece's public debt is set to climb above one and a half times national output by 2013 under to its EU/IMF rescue plan.
"It is one possible scenario," said a European Union source, commenting on the timing and nature of such a move.
"Buybacks would involve retiring bonds or exchanging them or they could try to agree with creditors to reduce the coupon and extend the maturity," said a second source familiar with thinking in Germany's finance ministry.
"If you put those together you can get a decent reduction in net present value. They do not want to talk about anything that is not voluntary because to do that would spook the markets," he added.
A French presidential source told reporters the euro zone rescue fund could lend Greece and any other strugglers facing a debt maturity hump the money to finance buy-backs or debt swaps for longer maturities on a voluntary basis.
Other countries such as Ireland, which also wants to renegotiate the terms of an 85 billion euro rescue from the EU and the International Monetary Fund, are watching developments closely.
Greek Finance Minister Yiorgos Papakonstantinou has repeatedly said Athens will not force losses on creditors. There is still no agreed German position on debt relief but the Finance Ministry denied Berlin was considering such a scenario.
Any decision will depend on Germany's ability to extract far-reaching concessions from its euro zone partners on fiscal discipline and economic reforms in return for supporting weaker countries such as Greece or Portugal.
Euro zone credibility
German Chancellor Angela Merkel and French President Nicolas Sarkozy will float proposals for commitments to may euro zone economies more competitive at an EU summit on Friday, officials in Paris and Berlin said.
They will include incorporating deficit curbs in national constitutions, a common framework for company tax, greater wage flexibility and coordination on pension age, a "quid pro quo" which one diplomat said left some European partners cold.
Officials examining the timing of any Greek debt reduction are aware that waiting longer will see Greek debt migrate into EU hands and away from banks and other private investors as Athens uses EU loans to repay bonds as they fall due.
An early debt swap or buy-back could see a higher proportion of losses fall on private bondholders, such as insurers, pension funds or banks willing to take a write-down to reduce their exposure to Greece.
"If you wait until 2013, fifty percent of the outstanding Greek debt is going to be on the public balance sheet," said the second source.
This migration is already evident in statistics released by the Bank of International Settlements, which shows Greek borrowing, including state bonds, from foreign banks fell to $184 billion in September from $223 billion six months earlier.
One EU diplomat has told Reuters there is growing pressure on Germany to address Greece's problems this year.
"Greece is completely incapable of paying its debt," he said. "If you don't deal with the Greek problem this year, the euro zone will lose its credibility. Our interest in a restructuring is to prevent a total collapse of Greece."
Berlin will want to know how any change to Greek debt would affect German banks, the second biggest foreign creditors by nationality after French lenders.
Although they have reduced their exposure, German banks were still sitting on 40 billion euros of Greek loans and 154 billion euros of Irish debt, according to the most recent statistics.
However, some of these loans are held to maturity on the so-called banking book and would only incur losses if Greece defaulted and imposed a compulsory "haircut" on creditors.
Many analysts argue that Greece's debt, which is set to peak at 158 percent of its gross domestic product in 2013, may be too high for the country to repay entirely.
The price of credit default swaps on Greek bonds, used to insure against the risk of default, puts the chances of Athens defaulting at 30 percent over the next two years.
SOURCE: REUTERS
