EURO zone finance ministers are considering allowing Athens to buy back up to 40 billion euro of its own bonds at a discount as one of a number of measures to cut Greek debt to 120 percent of GDP within the next eight years.
Going into the second ministerial meeting in successive weeks, Jean-Claude Juncker, the chairman of the group, was cautiously optimistic that a deal would be struck.
"We must still reach an understanding on several details and I would expect that the chances are good that we will come to a final and joint solution this evening," he told reporters. "But I'm not entirely certain."
That caution reflects the complex options being discussed, ongoing political differences and the sheer scale of reducing Greece's debt mountain.
Under a proposal discussed by ministers, Greece would offer private-sector bondholders around 30 cents for every euro of Greek debt they hold, allowing Athens to pay down some of its vast outstanding obligations, a senior official involved in the discussions told Reuters.
Greek debt is trading at 20-30 cents on the euro depending on its maturity, but is likely to strengthen if the buy-back plan is confirmed, meaning any offer will have diminishing marginal returns.
The ministers, who failed to reach agreement last week, have also discussed granting Greece a 10-year moratorium on paying interest on about 130 billion euros of loans from the euro zone's emergency fund, which could save Athens around 44 billion euros over a decade, the official said.
There is also the possibility of reducing the interest rate on loans made by euro zone countries directly to Greece in 2010, from 1.5 percent to just 0.25 percent, although the official said Germany was opposed to such a step.
The range of options on the table underscored the determination to find a solution to Greece's debt problems nearly three years after they were first exposed, leading to contagion across the euro zone.
However, while some such as the debt buy-back have significant backing, others face opposition from one or more euro zone countries and the official emphasised that the ground could shift rapidly.
The IMF, which has participated with the euro zone in two bailouts of Greece since 2010, has said that Greek debt must be reduced to 120 percent of GDP by 2020 if it is to be sustainable in the long-run. If that isn't possible, there is a risk that the IMF will have to withdraw from efforts to stabilise Greece.
At a meeting a week ago, there were sharp differences between the EU and IMF, with Juncker saying Greek debt should be cut to that target only by 2022. Lagarde said that would be unacceptable.
On Tuesday, officials began by agreeing that the aim was to cut the debt to 120 percent by 2020, the senior official told Reuters. But it remains uncertain just what mix of measures will achieve that goal.
Under current projections, Greek debt is expected to be about 145 percent in eight years' time, meaning measures totalling around 25 percentage points of GDP, or 50 billion euros, are needed to get Greece back on track.
Pressure for the euro zone to come up with a solution is high not just because Greece is running out of money and financial markets want a dependable solution, but because Greece has taken virtually all the steps demanded of it to cut spending, raise taxes and overhaul its economy.
"It is clear that Greece has delivered," Juncker said.
AID PAYMENT COMING
As well as examining longer-term measures to put Greece's debt back on a stable footing, the ministers are expected to give a provisional go-ahead for the next tranche of up to 44 billion euros of emergency funds to be paid to Athens.
The tranche, which will help recapitalise Greek banks as well as keep the government afloat, could be paid as soon as Dec. 5 as long as Greece meets the last few outstanding commitments it has on overhauling its economy.
The payment would provide immediate relief to Athens, but it is long-term debt that is the core issue.
If not enough measures can be identified to get the debt-to-GDP ratio down to 120 percent by 2020, then euro zone countries may have to examine an option none of them likes -- writing off a portion of the loans they have made to Greece.
The European commissioner for economic affairs, Olli Rehn, said as he arrived for the meeting that the euro zone should be ready to do more for Greece in the coming years, an apparent nod to the idea of government-sector debt writedowns.
"It's essential now that we take a decision on a set of credible measures on debt sustainability and, at the same time, we need to be ready to take further decisions in the light of future developments," Rehn said.
He did not elaborate, but the idea of a haircut on official loans is off the table for now because many countries, including Germany, see it as politically and legally impossible.
French Finance Minister Pierre Moscovici said a deal was at hand, but everybody would have to make concessions.
"I have the impression that a political agreement is within reach and I think it is our duty as finance ministers to get it this evening. Everyone has to accept that they will have to go beyond their red lines," Moscovici said.
A fundamental problem for Greece is growth -- the economy has contracted for the past five years and will do so again in 2013. That means the debt-to-GDP ratio continues to rise to a near-unbearable 190 percent even though Greece is taking tough decisions to reduce it.
Euro zone officials have asked for a legal analysis of a debt buy-back, which would focus on the 60 billion euros of Greek debt owned by private-sector banks and institutions.
"It's possible as soon as tonight, it's an option on the menu," the official said.
The ministers will also have to decide how to finance two extra years, until 2016, they have given Greece to reach the target of a primary surplus that would allow the country to start cutting its debt pile in a sustainable way.
The EU and IMF estimates that such an extension would require almost 33 billion euros more in financing for Athens, which is politically difficult because of growing opposition to bailouts in many euro zone countries, notably Germany and Finland.