(Adds EU source on U.S. pressing IMF to go easy)
By David Milliken and Jemima Kelly
LONDON May 27 The United States urged
international creditors to show more flexibility in negotiations
with Greece's cash-strapped government to avert a possible Greek
default and exit from the euro zone with incalculable
U.S. Treasury Secretary Jack Lew issued the warning on
Wednesday in a stopover in London on his way to a meeting of
Group of Seven finance ministers in Dresden, Germany.
"My concern is not the goodwill of the parties -- I don't
think anyone wants this to blow up -- but ... a miscalculation
could lead to a crisis that would be potentially very damaging,"
Lew told students at the London School of Economics.
"The challenge for the Europeans, the political and economic
institutions -- the IMF -- is to show enough flexibility," he
Washington is the dominant shareholder in the global lender
and also sees strong geopolitical grounds for keeping Greece
firmly anchored to the European Union.
Finance ministers from the United States, Japan, Germany,
France, Italy, Britain and Canada are meeting in Dresden on
Thursday and Friday, and although Greece is not formally on the
agenda, it will be discussed on the sidelines.
Greece's government has said it does not have enough money
to repay loans from the International Monetary Fund without
further help from Europe.
Markets rallied strongly on Wednesday after Athens issued a
statement attributed to a Greek official saying negotiators had
begun drafting a staff-level agreement on a cash-for-reform
deal. However EU officials dismissed the report and said the
sides were still far apart on key issues.
A senior EU source said behind the scenes, the United States
was leaning heavily on the IMF and on Germany to be more
conciliatory towards Greece to permit a deal, if Greek Prime
Minister Alexis Tsipras also makes a significant move.
But further support for Greece is unpopular with the public
in many euro zone countries such as Germany, especially as the
current Greek government has reversed previous reforms.
While most Greek debt is now owned by public institutions
rather than commercial banks -- reducing the risk of a bank run
in case of default -- Lew warned against complacency.
"The notion that the risk is completely contained, that
there's no contagion -- I think that it's a mistake to think
that a failure is of no consequence outside of Greece. We don't
know the exact scope," he said.
Greece itself needed to pursue reforms which any government
would find hard, Lew added.
Lew's office said he spoke earlier on Wednesday with Tsipras
and urged him to find common ground with EU and IMF negotiators.
Lew was cautious about an IMF announcement on Tuesday that
the yuan was no longer undervalued. The United States
has long complained that China gives its exporters an unfair
advantage by not allowing the yuan to strengthen freely.
Lew said it was too early to say if China had permanently
changed its ways, and that the IMF may be unable to reach a
decision this year and add the yuan to the basket of currencies
like the dollar that form its internal currency, the SDR.
"The standard has to be what will they do when there's
pressure on the (yuan). For competitive purposes, will they
continue to refrain from intervention. And ... are they truly
committed to having a market-determined exchange rate?"
Addressing the U.S. economy, Lew said weak growth in the
first three months of the year had been an anomaly, and that he
expected the second half to be stronger.
Asked about the prospect of the Federal Reserve raising
interest rates, he said central banks needed to communicate
their intentions clearly.
Bond markets have been volatile in recent weeks as well as
last year, which traders partly attribute to uncertainty about
when the United States will start to raise interest rates.
(Additional reporting by Andy Bruce in London and Paul Taylor
in Brussels.; Editing by Paul Taylor/Mike Peacock.)