BERLIN (Reuters) - The top German at the European Central Bank urged his own country on Thursday to compromise in a stand-off over aid to Greece after officials said Finance Minister Wolfgang Schaeuble had hinted at possible debt forgiveness, then backtracked.
Germany, the EU's biggest economy and paymaster, has led resistance within the euro zone to calls from the IMF and others to accept losses on their Greek debt holdings and give Greece, entering its sixth year of recession, a chance to grow again.
Greece's international creditors will hold crunch talks next Monday - their third meeting in as many weeks - to unlock loans needed to avert bankruptcy for the stricken nation. The EU's top economic official said on Thursday a deal could be struck.
"Those who want to avoid a haircut of public creditors and see that as a red line, must be ready to move on other issues," ECB board member Joerg Asmussen was quoted as saying in Germany's Passauer Neue Presse.
"Everyone must show a willingness to move as that's the only way we can come to a result next Monday."
Schaeuble reiterated on Thursday his official view that a writedown of Greek debt by euro zone governments would be wrong and illegal. But two sources told Reuters he had signalled a more flexible attitude at a small gathering of ministers in Paris on Monday, before the failed talks in Brussels on Tuesday.
"I understand... that some kind of 'conditional debt relief' was suggested by Schaeuble, but that he had to backtrack," one euro zone source said of the Paris meeting. A second source confirmed his account.
The German finance ministry declined comment on the suggestion that Schaeuble had backtracked.
The second source said Schaeuble had referred to a speech last week by the head of Germany's central bank, Jens Weidmann, signalling possible support for debt relief for Greece in the future as a reward for implementing tough reforms.
"One can pose the question whether the leap of faith that you give (with a haircut) sets the right incentives or whether it would not make sense to set a haircut, which one will need in the end to regain capital market access, as a perspective for when the reforms... have been implemented," Weidmann said.
The Bundesbank chief suggested any debt forgiveness could only come in 2015 or later, as a reward if Greece carries out its tough adjustment programme. That would also be after German general elections in September 2013.
EU Economic and Monetary Affairs Commissioner Olli Rehn gave a similar hint when he told the European Parliament on Thursday that Greece's debt sustainability could be reassessed in the coming years if it sticks to its programme.
The second euro zone source said officials were discussing the option of different member states taking separate measures to help Greece - a sign that the divide between the creditors may be just too big to forge a common stance.
Chancellor Angela Merkel and Schaeuble have both raised such a prospect in the past couple of days.
Schaeuble said on Thursday a 'haircut' for public holders of Greek debt would end up harming Greece by blocking further aid.
"The moment we decide to give Greece a haircut, we cannot give Greece any new guarantees," Schaeuble told a conference.
"That is logical because the budget law rightly says you can only take on guarantees if you believe that the debt will be paid back, so you can't do both," he added.
Members of Merkel's centre-right coalition have said granting Greece debt relief would undermine the reform drive in other struggling euro zone countries such as Portugal.
Schaeuble said on Wednesday the funding gap could be funded by a mixture of letting Greece buy back its own debt at a discount, tapping ECB profits on Greek bond purchases and lowering interest rates on government loans to Athens, though not below the cost to lenders.
Rehn said Greece had taken all the reform steps required to receive its next 31 billion euro tranche of loans and finance ministers should be able to sign off on a deal next week.
"I trust everyone will reconvene in Brussels on Monday with the necessary constructive spirit, and move beyond the detrimental mindset of red lines," he told parliament.
"Frankly, I see no reason why we should not be able to conclude the package - and do away with the uncertainty that has been holding back a return of confidence, and thus of investment and growth, in Greece." (Reporting by Michelle Martin and Annika Breidthardt in Berlin, Luke Baker and Foo Yun Chee in Brussels writing by Gareth Jones; Editing by Paul Taylor)