UPDATE 1-No debt restructuring for Cyprus, EU's Rehn says

Tue Feb 12, 2013 8:47am EST

* Cyprus awaiting a bailout equal to its entire economy

* Wary of fallout, Commission rule out losses for depositors

By Jan Strupczewski and Leigh Thomas

BRUSSELS, Feb 12 (Reuters) - The European Commission is not working on a debt restructuring for Cyprus that would force heavy losses on investors, the EU's top economic official said on Tuesday, backing the island's finance minister who is firmly opposed to such a move.

Cyprus needs about 17 billion euros ($23 billion) from the euro zone to recapitalise its banking sector and to finance government spending over the next three years, which is almost as much as the whole Cypriot economy produces in a year.

That raises questions about whether the Mediterranean island will ever be able to pay back the money.

Olli Rehn, the European Union's Economic and Monetary Affairs Commissioner, said Cypriot government debt would not be restructured to impose losses on private creditors, as was done with the Private Sector Involvement (PSI) plan for indebted neighbour Greece.

"The European Commission is not working on any PSI option for Cyprus," he said. "Greece is a specific candidate and unique case."

He was less clear when asked if he would rule out the possibility of depositors in Cypriot banks losing money as part of a bailout.

"The Commission's intention is to ensure a fair burden sharing of the cost of restructuring or resolution of Cypriot banks," Rehn told a news conference after a meeting of EU ministers.

"We are working in order to find a solution that ensures both debt sustainability and financial sustainability in Cyprus," he said.

At a meeting in Brussels on Monday, Cyprus's finance minister made it clear he did not wish to impose losses on bank depositors as part of the country's bailout programme, saying talk of a so-called bail-in of depositors was "grossly exaggerated."

He has also said he opposes any sovereign debt restructuring.

The country asked for assistance in June 2012 and has spent the past eight months in on-off negotiations with the Commission, which is the EU's executive arm, the European Central Bank and the International Monetary Fund.

Once elections have been held on Feb. 17 and a new Cypriot president is in place, those talks will come to a head, with the EU and IMF finally certain of who in Cyprus will be responsible for meeting targets in the aid programme.

"I trust that we will be able to take a decision on the comprehensive package in March," Rehn said.