A Greek debt sustainability analysis prepared by the International Monetary Fund, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 percent of GDP in 2013 from around 160 percent in 2012 under a baseline scenario assuming the Greek economy would stop contracting next year.

But Greece now expects its economy to shrink by 3.8 percent in 2013, its sixth consecutive year of contraction, boosting its debt ratio to 179.3 percent.

"At the moment it looks like Greece's debt level will rise to well above the target of 120 percent of GDP by 2020," ECB Executive Board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.

To bring it back towards the desired level in 2020, Greece could organize voluntary buy-backs of its bonds, he said.

The country is currently locked in talks with its lenders on a further set of cuts and reforms in order to obtain a new loan tranche. A deal should be reached by the time EU leaders meet on October 18-19, Greek Prime Minister Antonis Samaras said in an interview with the Sunday edition of daily Kathimerini.

Money for buy-backs could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior euro zone official, who was in Tokyo for the weekend meetings of the International Monetary Fund and World Bank, said.

Because Greek bonds trade at very deep discounts, one euro of money borrowed from the ESM, the euro zone's permanent bailout fund, could reduce Greek debt by 1.5 euros, the official said.

A second euro zone official said that while borrowing from the ESM would in itself increase Greek debt, there was another way to reduce it.

DEBT FOR EQUITY

"What could change the overall level of debt is that, at some later stage, when banks can be directly recapitalized by the ESM, we could convert some of the euro zone loans for bank recapitalization into equity and this could help the debt ratio, but this is not going to happen before the end of next year," the second official said.

The euro zone's temporary bailout fund, the European Financial Stability Facility, has already lent Greece 25 billion euros to recapitalize banks, and 23 billion more is awaiting disbursement.

The 48 billion euros would be a sizeable chunk of Greece's total debt, currently estimated at around 330 billion euros.

Greek government spokesman Simos Kedikoglou said several options were on the table. "The ECB, which holds Greek government bonds, could satisfy itself with lower interest rates on those bonds," he told the Sunday edition of the Greek Realnews newspaper.

"Or, it could agree to roll them over when these bonds mature. Also, the recapitalization of Greek banks could take place directly through the ESM as is currently being considered for Spain."

Another ECB Executive Board member, Benoit Coeure, said the central bank would not consider rescheduling the Greek debt portfolio it held -- a suggestion repeatedly made by Athens.

The second euro zone official said Athens could use proceeds from the privatization of state-owned assets to retire debt.

"The privatization process is finally kicking in, the structure is ready," the official said. "You could expect a few billion euros from privatization to buy back debt. This could happen relatively quickly."

The debt sustainability analysis from March estimated Greek privatization revenues by 2020 at 45 billion euros, with 12 billion coming in 2012-2014.

The IMF is pushing for euro zone governments to restructure the debt that Athens owes to them -- almost 53 billion euros lent under Greece's first bailout program and 14.4 billion already disbursed under a second bailout.

The euro zone could also further lower interest on the loans for the first program, which now stands at 150 basis points, or lengthen the loan maturities or increase the moratorium time when interest does not have to be serviced.

But officials said there was little appetite among euro zone countries for a restructuring of official sector loans to Greece.

A senior Greek government official said the euro zone might deem Greece's debt sustainable even if it is seen exceeding the 120-percent-of GDP target in 2020.

"The important thing is for the debt to be on a downward trajectory," the finance ministry official told reporters in Athens on condition of anonymity. "The 120-percent number is not cast in stone, there's nothing magical about it -- it won't be the end of the world if in the end, the number is 116, 118 or 125 percent".

To help Greece return to growth, the euro zone and the IMF are discussing giving Athens an extra two years to reach a primary surplus of 4.5 percent of GDP, pushing back the date to 2016.

Greece has said two extra years would cost 13 billion to 15 billion euros and officials said the euro zone realizes it will need to come up with the money.

But no decision on the financing has been reached yet.

(Reporting by Jan Strupczewski and Harry Papachristou and Lefteris Papadimas in Athens; Editing by Tim Ahmann and Jason Webb)

• A Permanent Economic Emergency