By Michele Kambas
NICOSIA (Reuters) - Greece's election has cleared the way for Cyprus to obtain urgently-needed funds to recapitalize its banks by the end of the month, either from the EU rescue fund or through a bilateral loan, its finance minister said on Tuesday.
Cyprus is heading towards a firm deadline of June 30 to find 1.8 billion euros to recapitalize its second largest lender, Cyprus Popular Bank, which was hurt by its exposure to a writedown on its Greek debt holdings.
That could make Cyprus the fifth euro zone country to turn to the European Union's bailout fund after Greece, Ireland, Portugal and Spain, but it is also considering taking a bilateral loan instead, possibly from Russia.
Either option would require Cyprus borrowing a proportionately large 10 percent of its GDP.
"We are optimistic we will get the financing we need to recapitalize the banks, whether that will be through a bilateral agreement, or through the (EU)," Finance Minister Vassos Shiarly said.
"We believe that with a new Greek government now, swifter arrangements can be made," Shiarly said. "Certainly the direction we think is that Greece will have a government which will retain Greece in the euro zone, and that is a very positive development, it takes away a lot of the pressure and anxiety which may come about for the euro zone system and Cyprus."
The Mediterranean island's banks are heavily exposed to Greek debt, and the prospect of a new Greek government rejecting an EU bailout was viewed in Cyprus as a potential catastrophe that would multiply the cost of Nicosia's own bailout.
Those concerns subsided after the victory in Sunday's election by Greek conservative leader Antonis Samaras, who is committed to continuing Greece's EU bailout.
Shiarly did not say how much Cyprus would seek beyond the 1.8 billion euros it needs to fund Cyprus Popular, which needs capital to satisfy regulators after its balance sheet was hurt by a write-off of Greek government debt this year.
BANK PROBLEMS OR BROADER?
Cyprus, which accounts for about 0.2 percent of the euro zone's economy, has been at pains to stress that its economic predicament is confined to its banking sector. Government officials have implicitly laid blame on lax supervision by a former regulator and by the banks.
But fiscal slippage and delays in reforms have also been cited by ratings agencies, two of which now class Cypriot sovereign paper as junk.
Athanasios Orphanides, a former influential ECB governing council member and ex-governor of the Cypriot central bank, laid blame squarely on Cyprus's government, saying it should never have accepted a write-down on Greek debt in the first place.
"If you hadn't supported this decision, or if you had sought protection for the Cypriot banks as you should have insisted upon, Popular would not be facing this problem today," Orphanides said in an open letter to Cypriot President Demetris Christofias.
Orphanides, a former senior adviser to the U.S. Federal Reserve before returning to his native Cyprus in 2007, was replaced when his five-year term expired last month. His relations with Christofias were frosty, and Orphanides had frequently said he resisted political pressure to bow to demands.
"The banking system of Cyprus has solid foundations," Orphanides said, noting that in the last month of his term, in April, deposits were still rising.
No application to the EU had yet been submitted, and any bid would look at overall needs of the economy, Shiarly said. Cyprus was not seeking new funds to cover its fiscal needs which are covered by current loans though Shiarly did not rule out any aid may not be restricted just to the banking sector.
"Time is pressing, we are counting the hours before June 30, and the last time I checked there are 278 hours within which we must arrange the recapitalization of the banks," he said.
Christofias, the EU's only Communist leader, is keen to avoid the fiscal and regulatory conditions that the European Union attaches to its bailout funds. In particular, Cyprus jealously guards its 10 percent corporate tax rate, the EU's lowest, which attracts offshore investment.
(Additional reporting by George Psyllides; Writing by Peter Graff; Editing by Jeremy Gaunt)