INTERVIEW 1-Cyprus minister won't rule out privatisation in bailout
* Cypriot minister says Greek debt restructure a mistake
* Says island isn't seeking any EU favours, just a loan
* Island seeks extension in repaying Russian loan
* Cyprus sought EU aid in June
(Adds quotes, detail)
NICOSIA, Jan 18 (Reuters) - Cyprus's finance minister Vassos Shiarly does not rule out privatisations if needed to seal a bailout for the island and make a debt even as high as 17.5 billion euros sustainable, he told Reuters on Friday.
Vassos Shiarly also said in an interview that the island had formally requested a five-year extension from Russia to repay a 2.5 billion euro ($3.3 billion) loan due in 2016, and that a writedown of Greek debt implemented in early 2012 was a mistake.
Cyprus, one of the euro zone's smallest economies, applied for financial aid from the European Union and the International Monetary Fund in June last year. Its banks were badly burnt by an EU-sanctioned writedown of Greek sovereign debt held by private investors.
"The Greek PSI (debt writedown) was a gift to Greece," Shiarly told Reuters.
"We are not asking for a gift. We are asking for understanding, and a loan on fair terms so we can overcome these financial difficulties we are facing at the moment."
The east Mediterranean island has in the past blamed its banks' exposure to Greece for its woes. However it is the first time a minister in government is known to have publicly described the writedown, approved by EU leaders - and by Shiarly's boss, the Cypriot president - as a mistake.
"There are many people in Europe who believe that it was a mistake to go for a PSI. I say it as well," said Shiarly.
Bailout talks for Cyprus have been complicated by concerns the potential bill could equal the island's 17.5 billion euro annual economic output, making it difficult to pay off.
"There is a provision, a reference, to a possible privatisation if need be," Shiarly said, referring to the draft bailout deal. "That will be considered by us at the time the (bank recapitalisation) figure is known, but not until then."
The bailout report did not name privatisation candidates but potential candidates are the Electricity Authority, Cyprus Telecoms and the Cyprus Ports authority.
Cyprus's President Demetris Christofias, who is not seeking re-election in a Feb. 17 election, has said he is against privatisations. Nicos Anastasiades, an opposition leader now leading opinion polls, has not ruled selloffs out if needed but says it won't be a priority for his administration.
Shut out of international capital markets for almost two years, Cyprus is still waiting for its loan. Meanwhile, the government has to rely on short-term, high-cost debt from semi government corporations to pay public sector workers.
A draft memorandum concluded between Cyprus and lenders late last year provisionally assessed bank needs as up to 10 billion euros, though officials expect eventual needs to be less. Fiscal requirements until 2016 are between 7 and 7.5 billion euros.
Cyprus says it has gone the extra mile to introduce reforms, including public sector cutbacks, pension reform and tax hikes. "We did what was expected of us, and more," Shiarly said.
Cyprus and the EU have been emphatic there can be no debt writedown. It would be futile since most debt is held by the same institutions the bailout intends to rescue, Shiarly said.
The Greek debt writedown "caused a lot of upheaval and one of the problems we are facing - in fact, one of the main reasons we are facing problems is because we accepted the PSI proposal which has added some 25 percent to our national debt," Shiarly said.
In defining the total bailout need - and whether Cyprus may have to resort to privatisations - much now hinges on an asset quality review expected imminently on Cypriot bank recapitalisation needs.
But even with an extreme scenario of a 17 to 17.5 billion euro bailout total, "at that figure, the debt can be made sustainable," Shiarly said.
($1 = 0.7524 euros)
(Reporting by Michele Kambas; Editing by Ruth Pitchford)