NICOSIA (Reuters) - The head of Cyprus's central bank said on Tuesday the upheaval of an international bailout in March could have been avoided if the island nation had petitioned for aid earlier.
Panicos Demetriades also chided bankers for accumulating large amounts of Greek government bonds, whose EU-approved restructuring in late 2011 proved to be deeply harmful for Cyprus.
Cyprus took the unprecedented step of winding down a major bank and forcing losses on large depositors at a second bank to qualify for 10 billion euros in aid earlier this year.
The banks had been heavily exposed to Greek sovereign debt and suffered huge losses on holdings when that country's debt was restructured in another rescue package by the EU and IMF.
Demetriades, who took over the helm at the Cypriot central bank in May 2012, said Cyprus could have petitioned for aid just after Greece's debt writedown was agreed by EU leaders in late 2011.
"If we had gone (for aid), possibly immediately after the Greek public sector involvement, we could have got better terms," Demetriades told a judicial inquiry in response to a question.
Demetriades, who also sits on the ECB's Governing Council, said a preliminary memorandum of understanding with lenders in late 2012 had earmarked a bailout amount which would have taken into account recapitalization needs of the two banks, Laiki and Bank of Cyprus.
Instead, he said, there was a rapid deterioration with the banking sector bleeding deposits, and the sector came under sudden scrutiny on allegations of money laundering - a charge Cyprus has consistently denied.
"Nobody expected it, what happened was unprecedented, particularly with regard to deposits. Nor did we expect the assault against our banking sector from the media, in one country in particular," he said. Concerns about money laundering in its banking network first appeared in German media.
Demetriades said Cyprus had been experiencing the financial strain from its banking sector's exposure to Greece for some time, as well as a rapid expansion abroad and a "huge" investment in Greek government bonds.
"For me, that was a catastrophic investment which shouldn't have been allowed to proceed," he said.
The government-appointed judicial probe continues in late August with testimony from Demetriades's predecessor, Athanasios Orphanides, and Nicos Anastasiades and Demetris Christofias, the present and former presidents.
(Writing by Michele Kambas; editing by Stephen Nisbet)