By George Georgiopoulos

ATHENS (Reuters) - Allowing the EFSF bailout mechanism to buy back bonds from the secondary market would help deal with Europe's debt crisis, European Central Bank Executive Board member Lorenzo Bini Smaghi told a Greek newspaper.

Euro zone policymakers are exploring ways to extend a rescue deal for overborrowed Greece and give it more time to repair its public finances. At the same time, authorities are trying to prevent the debt crisis from escalating in the bloc's periphery.

One option being looked at is enabling the European Financial Stability Facility (EFSF) to provide funds for buying back bonds from private investors, a move that could help the country lighten its debt load.

"We have said that a useful option would be for the temporary EFSF mechanism to buy bonds in the secondary market. This option, however, is not included in the design of the EFSF. If there was a way to change this, it would be useful," Bini Smaghi told Sunday's To Vima newspaper in an interview.

"This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily."

Euro zone officials have rattled markets by struggling to reach a deal on how to involve private sector investors in tackling Greece's debt mountain, a key demand of Germany before it signs off on more support for Athens.

"Governments have asked for the private sector's involvement (PSI). We believe that if this takes place it must be voluntary and based on a credible adjustment program by Greece. If there is a PSI it must be designed by governments," he was quoted as saying. "It must not constitute a credit event."

Bini Smaghi said Greece needs to do in two years what it has not done in 10 to correct its fiscal derailment and regain market trust.

The government last month passed a five-year austerity package of spending cuts, tax rises and state asset sales to ensure continued funding under a current EU/IMF bailout scheme.

"Markets do not trust Greece and the only ones left to fund it are European taxpayers. Experience shows that the more you do in the first two years, the better it is for the program's success," Bini Smaghi said.

He said failure to solve Greece's debt problem could heighten risks for other countries as well, urging the political opposition to support the government's efforts to emerge from the crisis and support economic reforms.

"It is a shame that the Greek political opposition does not offer support so that the economy can achieve what is needed in the next years to emerge from the crisis," Bini Smaghi said. "Political parties must place Greece's interest above theirs."

He also told the paper Greek banks should sell assets abroad and seek mergers with foreign lenders to attract capital.

"I am not proposing the buyout of all Greek banks from foreign ones, but if you could attract foreign banks it would help growth," he said.

(Editing by David Cowell)