Greek yields hit three-week highs as Germany says third bailout needed
* Germany says Greece needs third bailout, no more haircuts
* Greek 10-year yields hit highest in three weeks
* Bund yields come off highs as Fed plans hit emerging world
LONDON, Aug 20 (Reuters) - Greek bond yields hit their highest in three weeks on Tuesday after German Finance Minister Wolfgang Schaeuble said Athens would need a third bailout and would get no more debt haircuts.
Shaeuble's remarks to a campaign audience reminded investors that German elections in September could be a key point in the three-year-old euro zone crisis.
The comments were interpreted as an attempt to reassure German taxpayers, as the biggest contributors to so-called "official sector" loans to Greece, that they would be repaid in full. As a result, the remarks raised worries that private sector creditors would be hit again, even though they hold only about a tenth of Greece's debt.
"If you're not going to have official sector restructuring, then most people think their debt is unsustainable," said Alan McQuaid, chief economist at Merrion Stockbrokers.
"I understand he is a politician playing to the electorate's ears but something's got to happen in Greece sooner or later so the market has taken this in a negative way."
Many investors believe Greece's debt sustainability depends on whether official sector creditors, led by Germany, take losses on their loans to Athens.
Otherwise, any attempt at refinancing the debt would be very costly - if even possible - and would drag on Greece's economic recovery, prolonging the agony of its population.
Traders said flows were meagre in the usually very illiquid Greek debt markets, with yields simply being marked higher on the screens to reflect increased credit concerns.
Greek 10-year yields rose 28 basis points to 10.07 percent, their highest in three weeks, with the paper underperforming all its euro zone peers.
Yields are still a third of what they were before last year's local elections when fears Greece could leave the euro zone peaked and half levels hit after Greece's private sector debt restructuring in March 2012.
EMERGING MARKET ROUT
Traders said the rise in Greek yields was also related to a broad sell-off in emerging markets, as investors returned money to German or U.S. markets as yields there rose in anticipation of reduced stimulus from the Federal Reserve.
Greece is now widely viewed as an emerging market.
Minutes from the Fed's July meeting, due on Wednesday, could shed light on whether stimulus withdrawal will start next month.
Flows out of emerging markets sent German Bund yields 6 bps lower on Tuesday, after hitting their highest since March 2012 at 1.924 percent on Monday. Bund futures closed 68 ticks higher at 140.61
"Investors are beginning to appreciate that the recent sharp squeeze in global market liquidity, across both developed and developing markets, has been destabilising and disinflationary, and unlikely to lead to a more hawkish stance by (major central banks)," said Lena Komileva, managing director at G+ Economics.
Some analysts said a sustained Bund rally would only be fuelled by weak data, but euro zone PMI surveys later this week were expected to show the bloc's economic recovery was on track.
"The sell-off is running out of steam at the moment but conditions for a significant rally are not there," said Patrick Jacq, European rate strategist at BNP Paribas.