Eurozone said to mull capping Greek debt servicing cost at 15 percent/GDP

Eurozone governments, Greece's biggest creditors, are ready to cap the country's debt servicing costs at 15 percent of GDP annually over the long-term as part of the promised debt relief to help the economy grow, eurozone officials have told Reuters.

It would mean the nominal payment would be lower if the Greek economy were struggling, higher if it was more robust.

Greece had been pushing for a reduction of the principal on the almost 197 billion euros that it now owes the eurozone, but eurozone finance ministers explicitly ruled out any such nominal "haircut" on Aug. 14th.

Instead, if a review of Greek reforms over the next two months shows that Athens is implementing the changes that the creditors have asked for, the eurozone will agree to adjust various parameters of its loans to make sure that the cost of servicing them for Greece does not exceed 15 percent of GDP.

"It is now widely accepted," one eurozone official with knowledge of the debt discussions said on condition of anonymity. "There is consensus now that this is the way to go."

In April, Greece's public debt stood at 301.5 billion euros, or 168.8 percent of GDP, down from 177.1 percent in 2014. The International Monetary Fund had previously deemed a country's debt sustainable if it was below 120 percent of GDP.

"For Greece however, this does not make sense, since it does not reflect grace periods, ultra-low interest rates and long maturities, which keep the cost of debt very low – lower than, for instance, in Germany," a second eurozone official said.

"Therefore, the new method to assess debt sustainability is to look at the cost of debt servicing as percentage of GDP, and this should not exceed 15 percent," the second official said.

Greece's debt servicing cost in 2015 was around 11 percent of GDP and will fall sharply in the coming years, but would rise again after the grace period on eurozone loans ends in 2023.

The parameters that can be adjusted to keep the cost at no more than 15 percent include loan maturity, grace periods and interest rates, although the last one is unlikely to be changed further because rates are already at financing cost.

By tweaking maturities and grace periods, the eurozone will be able to smooth out peaks of debt repayment over the next 20-30 years that could be difficult to handle for Greece.

"Once Greece gets it, it should provide lots of certainty and predictability," a third eurozone official said. "With this profile designed for debt servicing, eurozone member states will get their money back," the official said.

The official added that capping Greek debt servicing expenses would also help Athens return to full market financing, because private investors would have certainty about the country's debt spending over a very long period.

Officials said the 15 percent was a rather arbitrary number, but was likely to work.

"The IMF says that up to 15 percent of GDP, is normally ok, that in this case the debt is sustainable," Klaus Regling, who heads the eurozone bailout fund ESM, said on Aug 27.

"For Greece we know that the gross financing needs will be below 15 percent in the next 10 years. Afterwards it will be higher," Regling said.

"But by using a mix of variables… I assume it should be possible to lower the gross financing needs below the 15 percent also in the long run," he said.

German Chancellor Angela Merkel also seemed persuaded that was the way to go.

"When the repayments begin one has to make sure that the burden will stay below the 15 percent threshold," she said on Aug 31 in Berlin. [Reuters]