* Dispute between lenders holding up cash for Greece
* Weidmann says haircut not definite, contains risks
* Possible debt reduction could come at end of process
* France on track to control its deficit
By Annika Breidthardt
BERLIN, Nov 16 Any new haircut of Greece's debt should only come as a reward for Athens implementing the reforms it has signed up to, European Central Bank Governing Council member Jens Weidmann said on Friday.
A row between euro zone governments and the International Monetary Fund over how to make Greece's giant debt mountain manageable is holding up the release of 31 billion euros ($40 billion) in emergency loans needed to keep the country afloat.
IMF officials have argued that some writedown for euro zone governments is necessary to make Greece solvent but Germany, the biggest contributor to the bloc's bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.
"I regard as an open question whether the need for a haircut in debt arises," Weidmann, who also heads the German Bundesbank, said at an event organised by the newspaper Sueddeutsche Zeitung in Berlin.
A haircut would only make sense as a reward for completing a reform package that puts the country's finances on a sustainable basis, he said.
Once that was achieved, the country could then see its debt load cut and return to markets for funding instead of having to rely on bailout funds.
"One can pose the question whether the leap of faith that you give (with a haircut) sets the right incentives or whether it would not make sense to set a haircut, which one will need in the end to regain capital market access, as a perspective for when the reforms... have been implemented," Weidmann said.
Banks, insurers and other private investors holding about 206 billion euros of Greek bonds took big losses on the nominal value of their securities earlier this year as part of an earlier bailout, but the ECB did not participate.
Weidmann stressed the importance of the right timing for another such move, saying now would be too soon.
"I can do a debt writedown today (but) if the budget, the deficit are not sustainable, I will be in the same situation again in 10 years time as today and that certainly would not make sense," he told the conference.
Weidmann's fellow Governing Council member Luc Coene on Thursday became the first ECB policymaker to say that another haircut on part of Greece's debt was probable.
Asked whether the Belgian central bank chief had been reflecting a growing view in the ECB that an official sector haircut on Greek debt was inevitable or speaking for himself, a senior ECB source said Coene had expressed a personal view.
Weidmann did not address whether the ECB could participate in such a move, but the central bank's President Mario Draghi said earlier this month that there was little more it could do to help the indebted country.
The 17-country bloc's central bank holds Greek bonds with face value of about 50 billion euros, bought through its first government debt-buying scheme, the Securities Markets Programme (SMP).
European Energy Commissioner Guenther Oettinger, a member of Chancellor Angela Merkel's Christian Democrats, considers a haircut for public creditors inevitable, Germany's Bild newspaper said in an advance copy of an article due to be published on Saturday.
"At the end of the day we will not be able to avoid a haircut for Greece's public creditors," the newspaper cited him as saying. That puts Oettinger at odds with the German government, which is against a haircut.
FAITH IN FRANCE
Bundesbank chief Weidmann, who has been on the losing side in many recent ECB decisions, has been vocal in his opposition to a new ECB programme which would back-stop countries such as Spain and Italy if they came under renewed market attack.
Two German policymakers resigned because of its predecessor, the SMP, saying the ECB overstepped its mandate by buying government debt.
Those resignations did not have much impact, Weidmann said and ruled out stepping down himself, even though he believed the new measures were outside the "core" of monetary policy.
Weidmann also said he was confident France would be able to fix its budget.
"When I look at the rate of spending, I do see there that the finance minister is facing challenges but on the other hand one must not forget that in comparison, for instance with Germany, France has a better perspective for instance in terms of demography," he said.
"I am confident that the French government will meet the challenges it faces."
Earlier on Friday, French officials angrily rejected a charge by Britain's The Economist weekly that France was the "time-bomb at the heart of Europe" and a danger to the euro single currency, accusing the magazine of sensationalism.