LONDON- Lebanon's bond holders may have to write off 70% of their investments and the value of the country's currency might be cut in half in an International Monetary Fund rescue, analysts at Capital Economics said on Thursday.

Lebanon formally requested the IMF's technical help on Wednesday as it tries to avoid a full-blown economic collapse.  Whether that turns into a formal bailout remains to be seen, but analysts have started to evaluate possibilities.

"Past experience suggests that this will involve haircuts (debt write-offs) of up to 70%," Capital Economics' Jason Tuvey wrote in a note.

That would wipe out banks’ capital, and the cost of re-capitalising the banks would come to around 25% of Lebanon's gross domestic product. IMF technical assistance could help limit the strains.

A cut in government spending of 3% to 4% of GDP will also be needed to prevent the debt burden from growing. Austerity will focus on reining in public-sector wages and overhauling the state electricity company.

As in Egypt in 2016, the IMF would be likely to insist that – as a pre-condition to a deal – authorities devalue the Lebanese pound, Tuvey said.

Black-market exchange rates are now around 30% below the country's official rate, but the IMF's most recent review of Lebanon estimated the currency was over-valued by 50%.

"We think the currency could fall by 50% against the dollar," Tuvey said. "And in the meantime, the economy is likely to fall into an even deeper recession. Overall, we expect GDP to contract by 5% this year. Our forecast lies right at the bottom of the consensus range."

(Reporting by Larry King) ((marc.jones@thomsonreuters.com; +44 (0)207 542 9033; Reuters Messaging: marc.jones.thomsonreuters.com@reuters.net Twitter @marcjonesrtrs))