Greece's new government dropped calls for a write-off of its foreign debt and proposed ending a standoff with its official creditors by swapping the debt for growth-linked bonds on Monday, a week after its election on an anti-austerity platform.
Finance Minister Yanis Varoufakis, in London to reassure private investors that he was not seeking a showdown with Brussels over a new debt agreement, said the new left-wing government would spare privately held bonds from losses, a source told Reuters.
The reported proposals, which included a pledge to reform the Greek economy, contrast sharply with the government's strident vows in Athens last week to ditch the tough austerity conditions imposed under its existing bailout.
Late on Monday, Varoufakis issued a statement saying that comments of his to financial investors had been misinterpreted. He gave no details but he was widely reported in Greek media to be backing down from the government's aim of reducing the debt.
"The government and the finance minister will not back down, irrespective of how grieved some people are by our determination," he said in the statement.
It was not clear whether the proposals would be accepted by European heavyweight Germany, which opposes softening the terms.
Varoufakis had not discussed the swap with officials from its European Union or European Central Bank creditors, said the source, who had direct knowledge of the plans but would not be named due to the sensitivity of the issue.
The finance minister also said he had not put a value on the swap, the source said, calling it a "work in progress."
"These bonds held by the ECB right now can be restructured. It's possible to turn it into perpetual bonds to be serviced, or growth-linked debt," said the source. "It's the same with a proportion of the other bilateral bonds held by the official sector."
Germany's Finance Minister Wolfgang Schaeuble told Reuters in an interview earlier on Monday that Berlin would not accept any unilateral changes to Greece's debt program.
"We want Greece to continue going down this successful path in the interests of Greece and the Greeks but we will not accept one-sided changes to the program," he said at the Reuters Euro Zone Summit.
Varoufakis called his plan a "menu of debt swaps" that meant Athens would no longer call for a write-off of Greece’s 315 billion euros ($360 billion) of foreign debt, the Financial Times reported.
"What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda," Varoufakis told the newspaper.
"I’ll say, 'Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece'."
Athens planned to target wealthy tax-evaders and post primary budget surpluses of 1 to 1.5 percent of gross domestic product, he told the paper, even if it meant his party, SYRIZA, could not fulfill all the spending promises on which it was elected.
The finance minister and Greece's new Prime Minister Alexis Tsipras are touring European capitals in a diplomatic offensive to replace Greece's bailout accord with the European Union, ECB and International Monetary Fund, known as the "troika."
On Tuesday, Tsipras will meet Italy's Prime Minister Matteo Renzi, a young center-left leader thought to be among those most sympathetic to calls for leniency.
Varoufakis said he was confident he could reach a negotiated settlement soon, telling Britain's Channel 4 news it was time to stop Greece being a "festering wound" on Europe and dismissing a suggestion the ECB could block a new deal.
He met international investors on Monday evening. Michael Hintze, founder and CEO of hedge fund CQS, asked afterwards if the minister had proposed a debt swap, said "It's more balanced and broader than that," without elaborating.
The source told Reuters losses would not be forced on private investors, saying: "They have had enough hair cuts."
In a statement released by the Greek Finance Ministry early on Tuesday in Athens, Varoufakis said the government's aim was to pull the country out of "debt serfdom".
After a tumultuous first week in which the firebrand government indicated it intended to keep campaign promises to ditch the tough austerity conditions imposed under its existing bailout, the emphasis this week appears to be on maintaining that a new deal is still possible.
"We are in substantial negotiations with our partners in Europe and those that have lent to us. We have obligations towards them," Tsipras said at a news conference in Cyprus during his first foreign visit as prime minister.
When asked whether Greece would seek aid from Russia, which is a worsening standoff with Europe and the United States over Ukraine, he said: "Right now, there are no other thoughts on the table." Germany said Russia would not be a viable substitute.
Greece, unable to borrow on the markets and facing pressure to extend the current support agreement when it expires on Feb. 28, is looking for a bridging deal to provide breathing space to propose a new debt arrangement.
Exactly how much time Athens has to reach a deal with its creditors remains to be seen. In theory, there are only weeks left: once the bailout expires at the end of February, the ECB could be obliged to pull the plug on funding for Greek banks. In practice, however, an alternative interim funding mechanism for the banks may be found.
After that, Greece has large debt payments due in March, although officials say it could have enough cash on hand to meet them, avoiding a crunch until later in the spring.
Tsipras repeated calls already made by Varoufakis for a mechanism of inspections by experts from the "troika" overseeing Greek finances to be dismantled and replaced by direct negotiations between Athens, the EU and IMF.
"I believe that this would be a mature and necessary development for Europe," he said.
But Germany said "Nein."
"The German government sees no reason to scrap this mechanism of evaluation by the troika," Finance Ministry spokeswoman Christiane Wirtz said in Berlin.
Varoufakis, an outspoken economist who has likened EU austerity policies to "waterboarding", began his European tour over the weekend in Paris, where the center-left government is thought to be more sympathetic than others to the case for relaxing lending conditions.
He then moved to London to meet investors whose confidence is crucial, saying he was not in "a kind of Wild West showdown" with the EU, but aimed to strike a mutually beneficial deal to minimize the cost of the crisis for the average European.
French Finance Minister Michel Sapin said after meeting Varoufakis that Athens could not expect a straight debt write-off, but left the door open to other options that include giving Athens more time for repayment.
Varoufakis met about 100 banks and financial institutions in London. An organizer said one of the meetings had to be moved from a upmarket London members' club, because Varoufakis wouldn't wear a tie.
Varoufakis also met British officials, seeking more European allies, although Britain is not a eurozone member.
After meeting him, Britain's finance minister, George Osborne, called the stand-off between Greece and the eurozone "the greatest risk to the global economy".
"I urge the Greek finance minister to act responsibly but it's also important that the eurozone has a better plan for jobs and growth," Osborne said.