Merkel ally rules out "haircut" after Greek deal failure

Two women walk past by a shutter of a closed bank with a graffiti in central Athens, August 28, 2012.

BERLIN (Reuters) - A senior lawmaker from Chancellor Angela Merkel's conservatives warned on Wednesday against any write-down of public holdings of Greek debt, saying it would send a fatal signal to other bailout countries and fail to address the roots of Greece's woes.

Greece's international lenders, who met in Brussels late on Tuesday, failed for the second week running to agree how to get the country's debt down to a sustainable level and will have a third go at resolving their most intractable problem in six days' time.

Norbert Barthle, budget spokesman for Merkel's Christian Democrats (CDU), told German radio it was not surprising that no agreement had been reached given opposing views over how to plug Greece's funding gap.

Christine Lagarde, the head of the International Monetary Fund (IMF), is pressing European governments to accept losses on their loans to Greece, but Merkel has staunchly opposed this course.

"It would have three consequences which we find bad," Barthle told Deutschlandfunk. "It would cost money, it would be a fatal signal to Ireland, Portugal and possibly Spain, as they would immediately ask why they should accept difficult conditions and push through difficult measures... and it would have consequences under budget law."

"A debt haircut may be the most comfortable and easy path for the affected country .... but our aim must be to fight the roots of the indebtedness."

Carsten Schneider, a budget expert for the opposition Social Democrats (SPD), said the government's strategy on Greece was a failure and questioned whether its budget for 2013, being debated this week in parliament, could be approved given the uncertainty. (Reporting by Alexandra Hudson; Editing by Noah Barkin)