BEIRUT  - Lebanon's next government needs ministers with practical experience in finance and other areas to restore confidence in the collapsing economy, the head of the banking association said after the latest bid to form a cabinet fell apart last week.

Banks have faced a crisis since last year after political unrest, slowing remittances and a foreign exchange liquidity crunch left the state struggling to finance a mountain of debt. Depositors have been frozen out of their dollar savings.

Adding to Lebanon's woes, the government quit after a huge port blast on Aug. 4 that devastated a swathe of Beirut. Efforts to form a new cabinet of non-partisan, specialist ministers have stumbled amid sectarian politics. urn:newsml:reuters.com:*:nL8N2GN016

"The most important step is to reestablish confidence," Salim Sfeir, chairman of the Association of Banks in Lebanon (ABL), told Reuters on Tuesday at the headquarters of Bank of Beirut, which he also heads.

"All will depend on the new government and the expertise that its members will have," Sfeir said in his office, where glass shattered in the blast had only just been replaced.

The central bank has told banks to recapitalise and provision for losses on Lebanese Eurobond holdings, as well urging them to repatriate cash sent abroad by big depositors.

Sfeir said a central bank circular requested repatriated funds be blocked for five years, offering liquidity to support the private sector. The funds would be placed in a correspondent bank abroad not with Lebanon's central bank, he added.

He said the "ultimate target" was to secure the return of $4 billion to $5 billion. 

France, which is leading international efforts to help Lebanon, has drawn up a policy roadmap, including implementing a capital control law approved by the International Monetary Fund.

Paris has said banks might have to accept that depositors would lose money, via what is called a "haircut" on deposits.

Sfeir said banks remained opposed. "The easiest formula is to have a haircut, but a haircut will create for you a social problem," he said.

Proposals by banks include setting up a fund to hold $40 billion in state assets to offer a guarantee to depositors.

"The state fund objective is to establish confidence as fast as possible to whoever is sceptical about the repayment of the deposits," Sfeir said, adding assets could still remain in state hands with income generated offering liquidity.

 

(Reporting by Edmund Blair; Editing by Kim Coghill) ((edmund.blair@thomsonreuters.com; Reuters Messaging: edmund.blair.thomsonreuters.com@thomsonreuters.net))