Eurozone countries may ask banks to accept losses of up to 50 per cent on their holdings of Greek debt, officials said earlier on Wednesday, as part of a grand plan to avert a disorderly default and try to end a crisis that threatens the world economy.
"If Greece's debts are really unsustainable ... then they must be reduced enough to give Greece a better outlook," Schaeuble told a party meeting of his Christian Democrat party.
"This can't be left to taxpayers alone," he added.
"I know that the participation of private creditors is not welcomed by the markets, but there is no way around having the private sector contribute ... if it is to be a sustainable and democratic process."
Two years into a crisis that leaders have warned could plunge western economies back into recession, the 17-nation currency zone is struggling to deliver the "big bang" crisis solution that foreign governments, economists and investors say is needed to stop the rot.
Complicating their task is political turmoil in some member states. Italy is bracing for a vote of confidence in Prime Minister Silvio Berlusconi, given continuing squabbling over measures to boost economic growth and consolidate the budget.
Schaeuble said "Italy cannot be spared" measures to cut debts and deficits and added: "When the ratings agencies give their negative views casting doubts on the political decision- making ability, you have a clue where the solution to the problem must be sought."
Standard & Poor's cut Italy's credit rating last month citing poor growth prospects and political instability. Moody's and Fitch Ratings also lowered their ratings on Italy, this month.
Schaeuble added that the Eurozone's planned permanent rescue mechanism, the ESM, must be put in place as soon as possible.
He warned however that "We must not take the route of cheap money", adding that such policy "has reached its limits" on the other side of the Atlantic.