UPDATE 2-EU clears Greek Hercules plan to cut $33 billion bad loans

* Hercules scheme to cut bad loans by 30 bln euros

* EU says scheme does not violate state aid rules

* Banks to pay annual fees for senior tranche guarantees (Adds comments from Greek officials, details)

By Robin Emmott and George Georgiopoulos

BRUSSELS/ATHENS, Oct 10 (Reuters) - Plans to cut bad loans at Greek banks by up to 30 billion euros ($33 billion) gained approval on Thursday from the European Union, which said they did not violate state aid rules.

Bankers told Reuters last month that they expected a green light from the European Commision for the scheme, that will help Greek banks offload the non-performing loans weighing on them.

The Hercules Asset Protection Scheme aims to bring down the amount of bad loans, without distorting the market through government subsidies.

The European Commission said in a statement it had found "Greek plans aimed at supporting the reduction of non-performing loans of Greek banks to be free of any state aid".

Banks in Greece have been working to reduce a pile of about 75 billion euros in bad loans, the legacy of a financial crisis that shrank the country's economy by a quarter. Shedding the bad debt is crucial for their ability to lend and shore up profits.

"Reducing bad loans is a top government priority, a systemic solution aiming at a big chunk of about 30 billion euros or 40% of the total of sour loans on bank balance sheets," a senior finance ministry official told reporters in Athens.

Greece's largest banks are National Bank, Alpha Bank, Eurobank and Piraeus Bank.

ITALIAN MODEL

The plan is similar to Italy's GACS model to help lenders offload bad debt by wrapping it into asset backed securities.

The official said the Hercules scheme is "innovative" as for the first time a sub-investment grade euro zone country will offer state guarantees on senior tranches of the securitised non-performing loans.

Hercules will involve setting up special purpose vehicles (SPVs) that will purchase the non-performing loans.

That sale would be financed by notes issued by the SPV with a government guarantee for senior tranches, but state involvement will be limited, the Commission said.

"The risk for the state will be limited since the state guarantee only applies to the senior tranche of the notes sold by the securitisation vehicle," it added.

It said the state guarantee on the senior tranche will only become effective if more than half of the non-guaranteed and risk-bearing riskier tranches have been successfully sold to private market participants.

Hercules is a voluntary scheme and will last for 18 months, although its duration could be extended. Legislation will be submitted to Greece's parliament by the end of the month, the official said.

Hercules will operate on a "first come, first served" basis.

"Assuming it was in force today, the annual fees banks would be paying the state for its guarantee of the senior tranches would be below 1.8%, lower than the Italian model" the official said. ($1 = 0.9081 euros) (Reporting by Robin Emmott in Brussels and George Georgiopoulos in Athens; editing by Raissa Kasolowsky, Christian Schmollinger and Alexander Smith)