Germany floats Greek euro "time-out" without more reforms

By Tom Körkemeier and Andreas Rinke

BRUSSELS (Reuters) - The German government has argued that Greece could take a five-year "time-out" from the euro zone and have some of its debts written off if Athens fails to improve proposals it has made for a bailout.

In a paper reviewing an offer of reforms from the Greek government in return for a three-year loan, Finance Ministry officials said the plan lacked "paramount important reform areas" and wrote: "We need a better sustainable solution."

The paper, seen by Reuters and first reported by Germany's Frankfurter Allgemeine Sonntagszeitung, offered "two avenues": either tighter conditions binding the Greek government to its new promises or a temporary exit from the euro.

Sources in the ruling left-right coalition in Berlin said the paper was drawn up after discussions among conservative Chancellor Angela Merkel, her centre-left deputy Sigmar Gabriel and Finance Minister Wolfgang Schaeuble. They stressed that the preferred option was for Greece to reform and keep the euro.

Schaeuble told euro zone peers at a crisis meeting in Brussels on Saturday that leftist Greek Prime Minister Alexis Tsipras had to do more to persuade Berlin to open negotiations on a new loan. But several sources familiar with the talks said Schaeuble did not raise the option of "Grexit" at the table.

The ministry paper cited three things Greece could do to improve its offer "rapidly and significantly" with the support of parliament:

- Place companies and other assets to be privatised into an independent trust committed to selling them and using the proceeds to pay off national debt. Euro zone officials said Schaeuble did raise this idea in the meeting on Saturday.

- Reform the public administration under the supervision of the European Commission.

- Legislate for automatic cuts in government spending if budget deficit targets are missed.

The alternative to a credible plan from Athens, the paper's authors wrote, was: "Greece should be offered swift negotiations on a time-out from the euro zone, with possible debt restructuring if necessary in a Paris Club-like format over at least the next five years."

Schaeuble said on Friday that Greece needed a debt "haircut" but such write-downs were illegal within the euro zone. He left unspoken the solution to the conundrum.

The Paris Club is a forum for restructuring sovereign debts. The paper noted that this would allow writeoffs of the nominal value of Greek debts to euro zone governments - something that is not permitted as long as Athens is also in the euro zone.

Greece, the paper said, would remain in the European Union and be provided technical and humanitarian assistance.

An EU official dismissed the suggestion of a temporary exit from the euro as a suggestion that had been floated in the past and dismissed as legally and economically unworkable.

(Writing by Alastair Macdonald; Editing by Paul Taylorand Jonathan Oatis)