U.S. Urges Greece, Creditors to Strike Debt Deal

Treasury chief Jacob Lew warns against complacency

By JASON DOUGLAS

Updated May 27, 2015 10:08 a.m. ET

The Wall Street Journal

LONDON—U.S. Treasury chief Jacob Lew on Wednesday urged Greece and its creditors to “double down” in their efforts to reach a deal to solve the nation’s debt crisis, saying no one should be complacent about the risks to the world economy from a Greek default and possible exit from the eurozone.

Addressing students in London before traveling to a meeting of finance ministers and central bankers from the Group of Seven industrialized nations in Germany, Mr. Lew said that although eurozone is in “a more stable place” than it was at the height of the currency union’s debt crisis in 2012, it would be wrong to assume that a disorderly Greek exit would be painless.

“No one should have a false sense of confidence that they know what the risk of a crisis in Greece would be,” he said at the London School of Economics.

The treasury said later that Mr. Lew spoke Wednesday to Greek Prime Minister Alexis Tsipras by phone. “Secretary Lew reiterated that failure to agree on a path forward would create immediate hardship for Greece and broad uncertainties for Europe and the global economy,” a Treasury spokeswoman said in a statement.

Greece is under time pressure to agree on economic overhauls with its creditors—the rest of the eurozone and the International Monetary Fund—to unlock fresh financing before it defaults on its debts to the IMF.

The Athens government is believed to have enough cash left to meet a €300 million ($330 million) IMF loan repayment on June 5, but probably can’t cover three further IMF repayments in mid-June.

Athens has been holding stop-start negotiations with eurozone and IMF officials in Brussels for weeks, but creditors are still not satisfied with Greece’s promises on economic reforms. Significant differences remain on pensions, privatization, labor law, and fiscal austerity.

A senior European Commission official said Wednesday that technical negotiations between Greece and its creditors have shown some progress though he warned that time is running out to reach a final agreement.

“There are a number of areas we are making some progress on,” said Valdis Dombrovskis, Vice President at the European Commission, the European Union’s executive arm, citing Greek proposals on VAT, a sales tax.

“It is also clear that we need to reach this deal very quickly because we are already a month behind the original schedule,” he added. A deal reached in February to extend Greece’s bailout by four months suggested that technical discussions between Greece and the institutions should be completed by the end of April.

In London, Mr. Lew acknowledged Greece’s left-wing government needs to take some difficult decisions.

“There is certainly a need for Greece to come up with a program that is credible,” he said. But he added that Greece’s creditors need to be “flexible” if they are to secure a deal.

Beyond the short-term deal that is needed in June to avoid default this summer, Greece and its lenders must also negotiate a fresh bailout program to keep the country afloat for as long as Greece can’t finance itself on bond markets.

The U.S. Treasury secretary said that Greece and its creditors are at risk of stumbling into another crisis if they don’t focus on finding a workable solution to the nation’s problems.

“What I worry about most is an accident,” Mr. Lew said. “Everyone needs to double down and treat the next move as the last.”

Meanwhile, Greece’s central bank hasn’t requested an increase to the amount of money Greek banks can borrow under an emergency lending program by the European Central Bank, according to a person familiar with the matter.

Under the emergency-liquidity assistance program, or ELA, the Greek central bank lends money to its country’s financial institutions. The loans carry a higher interest rate than standard ECB loans, and the credit risk stays with Greece.

Greek banks were forced into ELA in February after the ECB suspended an exemption that had allowed banks to use junk-rated Greek government bonds as collateral for regular ECB loans. Since then, the Greek central bank has lent some €80.2 billion to Greek lenders.

--Nektaria Stamouli in Athens and Matthew Dalton in Brussels contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com