June 13, 2012 / 2:37 PM / 7 years ago

Cyprus seen needing external aid for bank: Finmin

NICOSIA (Reuters) - Cyprus’s on Wednesday said it may need to step in to prop up its second-largest bank heavily exposed to Greece, and would need a bailout or a bilateral loan to foot the bill.

“Our first choice ... would be for the recapitalization of banks to be effectively dealt with through private solutions. But based on present circumstances, there is a high possibility the state would have to intervene to support one of the Cypriot banks,” Finance Minister Vassos Shiarly told an economics conference in Nicosia.

“This support would either come from a bilateral loan from a third country, or through the EU’s support mechanism,” he said in a prepared text.

Cyprus Popular Bank needs to raise 1.8 billion in equity by June 30, a deadline set by European regulators to bolster its regulatory capital. Its core tier 1 capital, an indicator of financial strength, was depleted by a write-down in the value of Greek bonds it held.

In legislation passed in May, the state pledged to intervene if Popular failed to raise the funds privately. Cyprus will need to turn to external borrowers for aid for the cash, since it has been shut out of international capital markets for a year, is in recession and is running deficits.

Shiarly said the government and the central bank were working to ensure the stability of the banking sector. “Admittedly it is not an easy task, but we are working tirelessly to find the most advantageous solution and which will have the least negative impact on our economy,” he said.

The country, which represents 0.2 percent of the euro zone’s economy, received a bilateral 2.5 billion euro loan from Russia, a close business partner, last year. Media reported that Cyprus has sounded out Russia on a new loan, but China has also been rumored as another interlocutor.

Reporting by Michele Kambas; editing by Ron Askew

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