Wary Cyprus eyes Greek vote before borrowing

NICOSIA (Reuters) - Cyprus will wait until after Greece's cliffhanger vote to decide how it will bail out its banking sector, its finance minister said on Friday, amid fears a Greek exit from the euro zone would cause its funding needs to explode.

The island nation, whose banks are highly exposed to the debts of its larger neighbor Greece, is closely watching the outcome of Sunday's Greek election, which European leaders fear could lead to Athens eventually leaving the euro zone.

Cyprus already needs urgently to find 1.8 billion euros by the end of this month to bail out its second largest bank, which saw its balance sheet ruined by a write-down in Greek government debt in March. Were Greece to leave the euro, Cypriot banks would face problems many times as large.

Cyprus has been considering options including a bailout from the EU rescue fund - the European Financial Security Fund (EFSF) - or a bilateral loan, perhaps from Russia, which already lent Nicosia 2.5 billion euros last year.

Finance Minister Vassos Shiarly said EFSF aid was not the only option, but that a decision on how to find funding would not be taken until after the Greek vote result.

"It is not necessary that we will seek a loan from the mechanism. There are other options, or a combination of options," he was quoted as saying on Stockwatch, a Cypriot financial news website.

"But these issues will be decided when we know the outcome of the vote in Greece... The result of the election in Greece will define the pattern of decisions for Cyprus and other EU member states," Shiarly said.

The government said earlier on Friday it was "working away from the glare of publicity" to find the money for the bank recapitalization, but gave no further details.

"The President of the Republic will soon meet with political parties to brief them and discuss issues concerning efforts to deal with the challenges that lie ahead for our country," government spokesman Stefanos Stefanou said in a written statement.

Whatever the Greek election outcome, cash-starved Cyprus faces the 1.8 billion euro bill - equivalent to about 10 percent of GDP - to bail out the Cyprus Popular Bank if, as expected, the bank fails to raise the cash privately.

The bank's balance sheet was damaged after it wrote down the value of its holdings of Greek government debt in the wake of a huge restructuring this year aimed at bailing out Athens.

Were Greece to tumble out of the euro zone, economists estimate that banks in Cyprus could face damage of 10 billion euros - crippling for a tiny country with just 1 million people.

Opposition parties say the authorities are dragging their feet on fiscal measures needed to shore up the economy before seeking aid.

Stefanou rejected such accusations, saying they send "the wrong message about the economy of Cyprus, which, despite its problems is in a better state than the economies of many other countries in the European Union."

Cyprus Popular needs to replenish its core tier 1 capital - an indicator of financial strength - to 9 percent by a June 30 deadline set by European banking regulators, which means any bailout must come by then.

(Reporting By Michele Kambas; Editing by Peter Graff)