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Merkel tries to reassure nervous German voters over Greece

German Chancellor Angela Merkel crosses a footbridge over the river Spree in front of the Chancellery during a German Government 'Open Door
German Chancellor Angela Merkel crosses a footbridge over the river Spree in front of the Chancellery during a German Government 'Open Door

By Madeline Chambers

BERLIN (Reuters) - German Chancellor Angela Merkel sought to reassure voters on Sunday that Greece would not need a debt writedown but left open the option of more aid for Athens as she struggled to contain a dispute which could hurt her in next month's election.

Finance Minister Wolfgang Schaeuble provoked a storm last week when he told a campaign rally that a new rescue for Greece was inevitable in comments that contradicted Merkel, who has said it is too early to discuss additional aid. The subject has dominated the election campaign ever since.

Merkel has tried to keep Greece out of her campaign to avoid angering Germans who fear they will foot the bill for more bailouts. She is tipped to win a third term in the September 22 poll partly because voters approve of her management of the euro zone crisis and her tough line with struggling states.

The chancellor on Sunday did not rule out a further Greek bailout, saying the euro zone would look again at the situation in the country in 2014, but she told Focus magazine that she did not see a debt haircut for Greece.

Asked if she would see things more clearly after the election, she said: "The election has nothing to do with it. I am expressly warning against a haircut. It could create a domino effect of uncertainty ... in the euro zone."

Many Germans are even more concerned about the direct hit they would take from a debt writedown than a third Greek bailout which would probably be far smaller than the previous rescues, though both are unpopular options.

As Europe's largest economy, Germany has the most exposure to Greece. Merkel could lose out if voters think she is being less than honest about Greek risks.

Private owners of Greek debt were forced to swallow significant losses on their holdings last year, but European governments and the European Central Bank have refused to take a hit so far. Germany has argued a writedown of Greek debt held by euro zone governments would be illegal.

A poll on Sunday showed that Merkel's centre-right coalition had lost its slender lead over parties on the left. If she is unable to continue her alliance with the Free Democrats (FDP), she may seek a "grand coalition" with the Social Democrats (SPD).

"SLEEPING TABLETS"

Opposition parties, who have long accused Merkel of hiding from German voters the truth that they will at some point have to pump more money into the euro zone, have seized on the issue.

Merkel's SPD rival Peer Steinbrueck said he would press her on the issue in coming weeks, including in a television debate in a week's time.

"(The government) has handed out sleeping tablets and tried to hush up the fact that the stabilization of the euro zone will have a cost," Steinbrueck told the Suedwest Presse newspaper.

Pollsters, however, say while the issue of Greece is dangerous for Merkel, opposition parties may not benefit as they have backed the bailouts in parliament.

On Sunday, Greek Finance Minister Yannis Stournaras said his country may need a further 10 billion euros in extra support from its euro zone partners but would not expect any loan to come with conditions attached.

Analysts have long predicted Greece will need more aid, albeit on a smaller scale than previous bailouts totaling about 240 billion euros. The IMF estimated last month Greece would face a funding gap of nearly 11 billion euros for 2014-2015.

Stournaras also ruled out another haircut, the most toxic question for German voters.

Schaeuble was bombarded by questions on the issue on Sunday at a news conference with ordinary citizens, as part of a government "open day".

He once again ruled out a debt writedown but reiterated the government's stance that Greece's partners would "decide on further measures" in 2014 if they were needed. "The truth is that it is highly probably that it will come to that," he said.

ECB Executive Board member Joerg Asmussen, a German, also warned that a debate about a second debt writedown was damaging.

"The repeated discussion distracts from what must be done for budget consolidation and more growth under the current program," Asmussen told Die Welt am Sonntag weekly.

Some economists, however, think a haircut may be unavoidable eventually. Germany's commissioner to the European Commission, Guenther Oettinger, said on Saturday he would not rule it out in the long run.

(Editing by Pravin Char)

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