Germany is prepared to soften language in the eurozone's permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules, four sources have told Reuters.
The shift would not completely remove the possibility of private bondholders having to accept losses in the future, but it would align the statutes of the European Stability Mechanism more closely with IMF rules, creating a more-level playing field for private buyers of eurozone sovereign debt.
The hope is that will reassure private bondholders that they are not being singled out for losses by European policymakers, bolstering their confidence in buying eurozone bonds - and potentially helping Italy and other under-pressure borrowers.
Following the insistence earlier this year that private bondholders should share the cost of a second Greek bailout, investors had feared that a precedent had been set which could be repeated any time another eurozone sovereign ran into trouble.
The ESM, which will have a capacity of 500 billion euros, is scheduled to come into force in mid-2013 and will replace the current bailout fund, the European Financial Stability Facility, which the eurozone is struggling to leverage into a more effective fighting force.
While acknowledging movement in Germany's position, a senior eurozone source emphasised that it depended on securing agreement among the 17 eurozone countries on stricter budget oversight, including sanctions for those that miss macroeconomic targets and the possibility of taking transgressors to court.
The source said private sector involvement (PSI) - the ability to have banks and insurance companies share losses when a sovereign defaults or restructures its debt - would not disappear from the ESM, "but the wording could be eased".
The changes are being discussed as part of wider negotiations about deeper and more rapid fiscal integration in the eurozone, which German Chancellor Angela Merkel sees as critical to combatting the sovereign debt crisis.
Discussions on the ESM, on deeper fiscal integration and on changing the EU treaty to enforce stricter rules for the eurozone will build to a head in the coming week, with a summit of EU leaders in Brussels on December 8-9.
Merkel will meet French President Nicolas Sarkozy in Paris on Monday to discuss positions ahead of the summit.
A second source said the aim was for the language in the ESM's treaty, which has already been drafted, to be altered so it was more closely aligned with international practice, a move that would reassure bond markets. "We hope to have the PSI rules in the ESM being fully in line with international practice and IMF rules," the source, a senior European Union official, said.
"There is also a French push to have PSI written down not in the ESM treaty itself but in the annexes" of the treaty, although it remains unclear whether that will be accepted.
The argument being deployed is that if iron-clad fiscal rules are adopted by the 17 eurozone members, the threat of default should be negligible and so, therefore, should the threat to bondholders.