UPDATE 4-Euro zone, IMF clinch deal to release Greek aid
* EU-IMF reach agreement on cutting Greek debt-to-GDP level
* Aim is to reduce Greek debt to 124 percent of GDP by 2020
* Discussions continue on how to achieve target
* Euro rises slightly after word of deal
BRUSSELS, Nov 26 (Reuters) - Euro zone finance ministers and the International Monetary Fund clinched agreement on a new debt target for Greece on Monday in a significant step towards releasing another tranche of loans to the near-bankrupt economy, officials said.
After nearly 10 hours of wrangling at their third meeting on the issue in as many weeks, Greece's international lenders agreed to reduce Greek debt by 40 billion euros to 124 percent of gross domestic product by 2020 through a package of steps.
The deal opens the way for a major aid instalment needed to recapitalise Greece's teetering banks and enable the government to pay wages, pensions and suppliers in December.
However, discussions were continuing on details of the measures to reduce Athens' debt burden.
The euro strengthen slightly against the dollar after news of a deal was reported by Reuters.
"It's going very slow, but we have financing and a Debt Sustainability Analysis. We've filled the financing gap until the end of programme in 2014," one official said.
Greek Finance Minister Yannis Stournaras said earlier that Athens had fulfilled its part of the deal by enacting tough austerity measures and economic reforms, and it was now up to the lenders to do their part.
"I'm certain we will find a mutually beneficial solution today," he said on arrival for the marathon talks.
Greece, where the euro zone's debt crisis erupted in late 2009, is the currency area's most heavily indebted country, despite a big "haircut" this year on privately-held bonds. Its economy has shrunk by nearly 25 percent in five years.
Negotiations had been stalled over how Greece's debt, forecast to peak at 190-200 percent of GDP in the coming two years, could be cut to a more sustainable 120 percent by 2020.
The agreed figure fell slightly short of that goal, and the IMF was still insisting that euro zone ministers should make a firm commitment to further steps to reduce the debt stock if Athens implements its adjustment programme faithfully.
The key question remains whether Greek debt can become sustainable without euro zone governments having to write off some of the loans they have made to Athens.
A source familiar with IMF thinking said the global lender was demanding immediate measures to cut Greece's debt by 20 percentage points of GDP, with a commitment to do more to reduce the debt stock in a few years if Greece fulfills its programme.
To reduce the debt to 124 percent by 2020, the ministers were putting together a package of steps including a debt buyback funded by a euro zone rescue fund, reducing the interest rate on loans and returning euro zone central bank 'profits' to Greece.
Germany and its northern European allies have so far rejected any idea of forgiving official loans to Athens.
DEBT RELIEF "NOT ON TABLE"
German Finance Minister Wolfgang Schaeuble told reporters that a debt cut was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans.
"You cannot guarantee something if you're cutting debt at the same time," he said. That did not preclude possible debt relief at a later stage if Greece completed its adjustment programme and no longer needs new loans.
The source familiar with IMF thinking said a loan write-off once Greece has established a track record of compliance would be the simplest way to make its debt viable, but other methods such as foregoing interest payments, or lending at below market rates and extending maturities could all help.
The German banking association (BDB) said a fresh "haircut" or forced reduction in the value of Greek sovereign debt, must only happen as a last resort.
Two European Central Bank policymakers, vice-president Vitor Constancio and executive board member Joerg Asmussen, said debt forgiveness was not on the agenda for now.
The options under consideration included reducing interest on already extended bilateral loans to Greece from the current 150 basis points above financing costs.
How much lower was still being debated -- France and Italy wanted to reduce the rate to 30 basis points (bps), while Germany and some other countries sought a 90 bps margin.
Another option, which could cut Greek debt by almost 17 percent of GDP, was to defer interest payments on loans to Greece from the EFSF, a temporary bailout fund, by 10 years.
The European Central Bank could forego profits on its Greek bond portfolio, bought at a deep discount, cutting the debt pile by a further 4.6 percent by 2020, a document prepared for the ministers' talks last week showed.
Not all euro zone central banks are willing to forego their profits, however, the German Bundesbank among them.
Greece could also buy back its privately-held bonds on the market at a deep discount, with gains from the operation depending on the scope and price. Officials have spoken of a 10 billion euro buy-back at around 30 cents on the euro, that would retire around 30 billion euros of debt, although since the idea was raised the potential gain has fallen as prices have risen.
FORGIVING OFFICIAL LOANS?
German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.
An opinion poll published on Monday showed Greece's anti-bailout SYRIZA party with a four-percent lead over the Conservatives who won election in June, adding to uncertainty over the future of reforms.
German paper Welt am Sonntag said on Sunday that euro zone ministers were considering a write-down of official loans for Greece from 2015, but gave no sources, and a euro zone official said such an option was never seriously discussed.