The euro zone must avoid triggering a so-called credit event as it hammers out a new deal on Greek debt, Olli Rehn, the European commissioner for economic and monetary affairs, said this evening.
"We have been discussing a Vienna style initiative and in that context we have also examined the feasability of a voluntary debt rescheduling or reprofiling on the condition that it will not create a credit event," he said.
Mr Rehn also confirmed that the euro zone held a teleconference on the Greek situation on this evening. When asked about the discussion, he said it centered on Greece.
"It was underlined that it is essential that Greece meets its fiscal targets for this year with concrete measures that have been agreed ... Greece is now committed to meeting targets. It has specified concrete measures," he said, and added extending debt maturities was part of the discussion.
Mr Rehn also said that while Germany is enjoying a strong economic recovery, other parts of the euro zone are seeing only moderate improvements.
"Germany is seeing a robust recovery but there are other areas in Europe where we are still talking about modest recovery," he added.
The warning follows a broader decline of economic sentiment in the euro zone in recent weeks, which has suggested the bloc's recovery has lost some momentum after a strong first quarter.
Mr Rehn also said he was concerned about the current debt strains in the US which are very serious and have an impact on Europe and the rest of the world.
"The situation concerning the US fiscal deficit and debt is a very serious one and the Republicans and the Democrats do seem to make much progress on an agreement (on the deficit)," Mr Rehn said.
"Some small steps have been taken but nothing fundamental ... I hope it finds a deal sooner than later because it has a real monetary impact on the whole world economy and certainly Europe."
"But at this stage it is difficult to be excessively optimistic over such a deal in the short term," he added.
Meanwhile, the euro zone edged closer today to a compromise on a second Greek bailout package under which private creditors would be asked to swap their sovereign debt holdings for bonds with longer maturities.
Several euro zone bankers, including the head of French heavyweight Credit Agricole, said they would support a maturity extension, a move that would not reduce Greece's massive debt burden but could buy it more time to meet its fiscal targets and avoid a harsher restructuring.
The European Central Bank, which has argued loudly against any form of debt restructuring, may also be warming to the idea of private sector involvement if a cut in the principal of Greece's debt can be avoided.
Greece sealed a €110 billion aid-for-austerity deal a year ago but has failed to restore confidence in its finances and a new package is in the works which could total €80 billion to €100 billion to cover Athens' funding needs through 2014.
Whether and how to involve the banks, hedge funds and other private holders of Greek debt in the new package has been hotly debated for weeks, with some officials worrying such a step could unleash contagion that envelops new countries like Spain, with disastrous consequences for the currency group.
Today, France said it rejected any restructuring of Greece's debt and would not change its stance.
But the German government, worried about a backlash from angry taxpayers and a possible rebellion in parliament, has been pushing hard for some form of private creditor involvement.
In a leaked letter sent on Monday to the heads of the European Central Bank, International Monetary Fund and his euro zone counterparts, German finance minister Wolfgang Schäuble demanded a "quantified and substantial" contribution from bondholders as part of any new Greek package.
"Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years," Mr Schäuble wrote in the letter.
Such a swap would amount to a restructuring of Greece's privately held debt, even if it was done on a voluntary basis, and ratings agencies have warned that they would view it as coercive and classify it as a default.
"If they do anything like Schäuble is suggesting then the ratings agencies will smash (Greece) and then they will move on and smash Portugal and Ireland," one trader said.
Reflecting those fears, the cost of insuring Greek debt against default rose as did the premiums investors demand to hold Greek, Irish and Portuguese debt instead of German benchmarks.
The stance of the ECB on private sector involvement will be crucial in any deal. The central bank is believed to be examining a debt swap scenario in which credit rating agencies would declare Greece in limited or "selective" default for a short period of time.
That would probably force it to impose a ban on the use of Greek debt as collateral in its money market operations, but the impact on the Greek banking system could be minimised through emergency liquidity measures until Greece was taken off limited default status.
The ECB could give investors an incentive to participate in a swap by removing the old Greek bonds from its list of eligible collateral. Other sweeteners are also under discussion by EU officials.
During a visit to Washington by German chancellor Angela Merkel yesterday, US president Barack Obama urged European countries and bondholders to prevent a "disastrous" default by Greece and stressed the importance of German "leadership" on the issue - a thinly veiled message that he expects Berlin to help.
Greece's debt burden stands close to €340 billion - or roughly 150 per cent of its gross domestic product (GDP).
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