G7 finance chiefs discuss growth risks, urge deal on Greece

By Gernot Heller and Paul Carrel

DRESDEN, Germany (Reuters) - Finance chiefs from the Group of Seven economic powers discussed ways to revive the faltering global recovery on Thursday as the United States leant on Europe to reach a deal to avert a Greek bankruptcy.

The threat of a Greek default, rising oil prices and bond market volatility are fuelling investor nervousness about the world's economy. A slowdown in China - which was not present at the talks in Dresden, Germany - is adding to the concern.

Speaking before meeting the G7 finance chiefs, International Monetary Fund Managing Director Christine Lagarde said there was still a lot of work to do before Greece and its international lenders could clinch a cash-for-reforms deal.

"We are all in the process of working towards a solution for Greece and I would not say that we already have reached substantial results," Lagarde told German television station ARD in comments translated from English to German.

"Things have moved, but there is still a lot of work to do," she noted, adding that she believed Greece would fulfil its commitments.

G7 sources said officials from the member countries - hosts Germany, the United States, Japan, Britain, France, Italy and Canada - were speaking "all the time" about Greece on the sidelines of the Dresden meeting.

But Greece did not come up at all during a formal symposium session on Thursday, when finance ministers and central bank chiefs listened to short speeches by leading economists on how to boost growth momentum, a German G7 delegation source said.

"The word Greece wasn't mentioned once," the source said.

Another official from a different G7 delegation said a discussion on Greece was set for Friday.

"(It) won't happen until tomorrow," said the official, adding that Thursday's schedule was full but "there maybe some leeway tomorrow."

Athens and its EU/IMF lenders have been locked in tortuous negotiations on a reform agreement for four months. Without a deal, it risks default or bankruptcy in weeks.

Greece's government said on Wednesday it was starting to draft a deal with creditors that would pave the way for aid, but European officials quickly dismissed the idea that the talks had reached such a stage.

On the eve of the G7 meeting, U.S. Treasury Secretary Jack Lew urged international creditors to show more flexibility. He said he feared a miscalculation could lead to a new crisis which could have consequences for the wider world.

The differences over Greece follow a growth-versus-budget consolidation debate between Washington and Berlin at G7 level.

GROWTH CHALLENGE

Meeting under the heading "Towards a Dynamic Global Economy", the G7 finance ministers and central bank chiefs began discussing economic reforms to increase their competitiveness.

But volatile markets, sensitive to differing growth paths between economic regions, risk derailing their efforts.

In Frankfurt, ECB Vice President Vitor Constancio said a sell-off in financial markets that derails the euro zone's recovery was the biggest risk to the bloc's financial stability. ECB President Mario Draghi is taking part in the G7 meeting.

Constancio spoke following a slump in Chinese stocks after several major brokerages tightened requirements on margin financing.

Bank of England Governor Mark Carney, who also chairs a global body of bank regulators, updated the G7 finance chiefs on progress towards a new code of conduct for bankers and other changes to the way financial markets are overseen after recent scandals in global currency and interest rate markets.

The finance chiefs also listened to presentations by leading economists, including Nouriel Roubini.

A German G7 delegation source said Roubini warned that while central banks - many of which have eased monetary policy - were taking the right steps, if other players did not step in to boost growth, financial risks would build that macroprudential instruments would no longer be able to contain.

The source added that the delegates also heard Nobel Prize-winning economist Robert Shiller warn that an asset bubble had already formed and it was necessary to hike interest rates now.

(Additional reporting by Michelle Martin, William Schomberg and Frank Siebelt in Dresden, and by Michael Nienaber in Berlin; Editing by Jeremy Gaunt)