Eurozone leaders opened a critical summit on Thursday targeting a deal to reduce Greece's runaway debt and save the euro from its worst crisis, even at the risk of an unprecedented default.
A draft agreement was put on the table for the 17 leaders following an 11th hour deal reached between the eurozone's two powerbrokers, German Chancellor Angela Merkel and French President Nicolas Sarkozy, a European diplomat said.
"I think we will be able to decide on a new programme for Greece" that will "attack the root of the problems," Merkel told reporters, adding that Greek competitiveness and the "sustainability" of its debt must improve.
The leaders dropped the idea of a bank tax to help fund a second Greek bailout, but they opened the door to German calls for private sector involvement, even at the risk of triggering a default, the diplomat said.
"We cannot exclude any possibility and everything should be done to prevent (a default)," Luxembourg Prime Minister Jean-Claude Juncker, head of the Eurogroup of finance ministers, said on arrival.
The euro fell after his comments, but Juncker insisted that the single currency was "not in danger" following weeks of market turbulence fuelled by signs that the crisis is dragging in Italy and Spain, and could spread across the world.
European Central Bank chief Jean-Claude Trichet, who has warned that a default would force the ECB to refuse to accept Greek bonds as collateral, took part in the talks with Merkel and Sarkozy in Berlin on Wednesday.
Germany, backed by the Netherlands and Finland, had been at odds with the ECB and Paris over Merkel's demands for private investors to shoulder some of the bill for the new Greek rescue, one year after a 110-billion-euro ($156-billion) bailout.
There are concerns that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default, with potentially dramatic domino consequences.
The European diplomat said the draft deal included a possible voluntary agreement by banks effectively to extend long-term repayments of Greek bonds or to swap bonds around to restructure its debt.
The goal is to reduce a debt load that has reached 350 billion euros ($499 billion dollars).
The size of the cut has yet to be decided and heads of European private banks were invited to the summit to discuss the plans. Merkel and Sarkozy held talks with Greek Prime Minister George Papandreou right before the summit.
"A text has been put on the table that would gain the agreement of the partners on virtually all the points," the diplomat told AFP, adding that credit agencies could interpret the solutions "as a default of payments."
Austrian Chancellor Werner Faymann indicated that a delay in repayments for Greece was in the offing.
"We must help Greeks to meet their obligations, this means extending the deadlines so that they can pay," he said.
On the eve of the summit, European Commission president Jose Manuel Barroso warned that "history will judge this generation of leaders harshly" if they fail to find a solution to the crisis.
"It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso said.
"Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can't do and won't do."
Nervous financial markets are keenly awaiting the outcome of the summit following several tumultuous days, prompting US and IMF calls for eurozone leaders to act decisively.
The European Union and the IMF provided last year a 110-billion-euro bailout to Greece that has proved insufficient. Since then, Ireland and Portugal received their own multi-billion-euro rescues.
Highlighting the global concerns, US President Barack Obama, who faces his own debt impasse with the US Congress, spoke with Merkel by telephone on Tuesday to discuss Europe's crisis.
The IMF, a partner in the Greek, Irish and Portuguese bailouts, has also urged European leaders to act decisively. IMF chief Christine Lagarde is attending the summit.
Merkel had unsettled markets on Tuesday by playing down expectations that the Brussels get-together would result in something "spectacular" to end Europe's problems in one go.
"Today's summit could provide the last chance for eurozone policymakers to get a grip on the region's debt crisis," said the research firm Capital Economics. "Anything other than a very decisive response could see the situation become irretrievable."