BEIRUT, March 12 (Reuters) - Lebanon's banks are poised for a major shake-out as a planned restructuring of government debt is set to leave many financial players illiquid, say bankers.
Banks are the largest creditors of the government, which is set to default after saying it would stop paying its foreign currency debt and is seeking a debt restructuring as a months-long economic crisis left its foreign currency reserves dangerously depleted.
The extent of the hit that banks - and their depositors -- will have to take is still uncertain, but bankers estimate the total sector shortfall at around $20 billion to $30 billion - based on provisions they will need to take for losses linked to deposits held at the central bank and lending to the government.
With Lebanon grappling with hundreds of thousands of job losses and mounting business closures, lenders also have to contend with growing soured loans to the private sector.
Almost all banks will need recapitalisation, said Jean Riachi, chairman and chief executive of FFA Private Bank, Lebanon's largest specialised bank.
"We have too many banks," he said. "The overall size of the banking sector will shrink. You'll probably end up with $40-60 billion in deposits compared to $150 billion now and a handful of big banks, some smaller family banks and specialised banks doing private banking and investment banking."
Lebanon has around 40 banks serving a population of around 6 million, with the sector having swelled to four times the size of the economy from decades of channelling billions of dollars every year from Lebanon's scattered diaspora to help fund the government.
But that flow of money from overseas has stopped and the government can no longer finance its budget deficits.
Economy minister Raoul Nehme has said the banking sector will shrink, while Prime Minister Hassan Diab has said the banking sector must be restructured.
Some banks have already started that process with stronger players already looking to acquire smaller lenders, said one banker.
An independent authority needs to be established to manage the sector's overhaul, including forcing mergers and liquidating smaller ones in a similar way to Cyprus during its 2012-13 financial crisis, said Riachi.
“I don't see the IMF or any creditors accepting a debt restructuring plan without addressing these issues," he said.
Consolidation has raised concerns about the impact on depositors with bankers and analysts saying it might be tricky to avoid some kind of losses imposed on at least the largest depositors.
Houlihan Lokey, which was hired by the Association of Banks of Lebanon to advise them on the restructuring process, has said that the association's main objective is to protect the interests of depositors. (Additional reporting by Tom Perry. Editing by Carmel Crimmins)