NICOSIA (Reuters) - Cyprus must swiftly recapitalize its banks following the island's bailout so they can begin lending again, the head of its banking association said, adding that offshore gas could be the economy's new engine.
Under the 10 billon euro international aid package agreed in March, Cyprus must close one bank, Popular CPBC.CY, and impose painful losses on deposits of more than 100,000 euros held at the euro zone state's biggest lender, Bank of Cyprus BOC.CY.
Both institutions were wrecked by lending to Greece.
Michael Kammas, general director of Cyprus's Association of Commercial Banks, said the government should quickly clarify exactly how much savers must contribute to recapitalizing the banks, as the uncertainty was strangling economic activity.
"The more decisions are delayed, it won't solve the confidence and stability issue which exists in Cyprus now," Kammas said in a interview with Reuters on Tuesday.
A final figure is due to be given in June, until when up to 90 percent of large bank deposits will remain frozen.
Cyprus had relied on its outsized financial system, which attracted deposits from abroad, especially Russia, to fuel growth but needs to diversify its economy following the bailout.
Kammas said untapped hydrocarbon deposits in the eastern Mediterranean could help the island and its banks recover from the "calamitous" impact of conditions attached to the rescue program by the International Monetary Fund and the European Union.
"It's a new course for Cyprus and there are lots of ways to get involved ... There are infrastructure projects with regards to the energy sector which need financing, and these are opportunities (for the banks)," he added.
"We are still open for business, and we will take advantage of the natural gas opportunities. We need to focus on what increases productivity."
Noble Energy (NBL.N) in 2011 reported an estimated 5 to 8 trillion cubic feet of gas in one field - more than Cyprus could use in a century. Texas-based Noble plans to launch an appraisal drilling to verify the find this year.
The government also plans to construct a liquefaction terminal on the island's southern coast [ID:nL6N0C6AG5].
Kammas said the banks were not wholly responsible for Cyprus's difficulties and that the financial system had been fundamentally sound until European leaders agreed to restructure Greece's debts in October 2011. The losses imposed on Greek bondholders cost the island's banks some 4.5 billion euros.
Reporting by Michele Kambas; Editing by Catherine Evans