* Relief palpable among Cyprus officials
* Greek ejection from euro would have been disaster
* Cyprus still must find 1.8 bln euros by month’s end
By Michele Kambas and Peter Graff
NICOSIA, June 17 (Reuters) - Greece’s election has pulled its smaller neighbour Cyprus back from the precipice - for now - but Nicosia still has urgent work to do to rescue its banking sector if it is to avoid becoming the next casualty of the euro zone crisis.
The relief of Cyprus officials was palpable on Sunday night as results came in from Athens showing conservative Antonis Samaras had won Sunday’s vote promising to stick to a European bailout, although the government did not immediately comment.
Cyprus, a small country with just a million people but a big offshore financial industry, still faces a European bank regulator deadline in just two weeks to find 1.8 billion euros - around a 10th of its GDP - to bail out its second largest lender.
But that is just a fraction of the damage that would have been done to Cypriot banks if Samaras had lost to leftist Alexis Tsipras, who threatened to toss out the bailout, and European leaders had responded by cutting off Greece’s funding.
“Not Armageddon just yet. Armageddon put off for another day,” said Fiona Mullen, a Nicosia-based economist for the consultancy firm Sapienta, who estimates Cyprus would need 10 billion euros or more if Greece were pushed out of the euro.
“I was worried last week that Cyprus had left it too late to go to the European stability mechanism to cover itself - not only for a bank bailout but for a Greek exit. It seems to have got a bit lucky.”
She said the sigh of relief would be shared even by the government of President Demetris Christofias, the EU’s only Communist leader, who is closer politically to Tsipras than to Samaras’s New Democracy conservatives.
Christofias supports easing the harsh austerity terms imposed on Athens in return for its bailout, but needs Greece to have a government that can work with Brussels to keep aid flowing.
“TOO MUCH AT STAKE”
“What is important for us is that there is a stable government. There is too much at stake for any uncertainty,” lawmaker Pambos Papageorgiou, of Christofias’s ruling AKEL Communist party, told Reuters.
“New Democracy appears to have won, but there is a clear message from the electorate that they want to stay in the euro zone but be able to have a chance to recover as an economy,” he said.
“It depends very much how the euro zone reacts to the result: if they are willing to talk to the new government and make the austerity programme a bit more viable, and also change some of the lending terms (for Greece),” he added.
For its own part, Cyprus must still find the 1.8 billion euros by the end of this month to bail out Cyprus Popular Bank , which saw its balance sheet damaged in March when private-sector lenders wrote off most Greek government debt.
Nicosia has said it is trying to arrange a bilateral loan, possibly from Russia, which lent it 2.5 billion euros last year. It could also get the funding from the European Financial Stability Fund, the EU’s rescue mechanism, but Christofias wants to avoid funds that come with too many fiscal and regulatory conditions attached.
Stelios Platis, who runs a financial consultancy firm in Cyprus, said the Greek result would buy Nicosia time, but not necessarily much. Cyprus still needs to find a way to reduce the massive exposure to Greek debt on the books of its banks.
“I think Cyprus is buying some valuable time, during which it has to insulate itself from any shocks arising from Greece, mainly to dissociate its banking sector from its Greek operations,” he said.
“I wouldn’t be too fast in drawing conclusions. Greece is not out of the woods yet,” he said. “I think it does buy Cyprus a few months.”