U.N. warns Libya's banking system at risk of collapse

(Corrects to JMC from GNC in Kubis quote in paragraph 9)

By Michelle Nichols

UNITED NATIONS (Reuters) -Libya's banking system "will likely collapse" if the country's two parallel central bank branches do not unify and stalled political talks could unravel a ceasefire, the U.N. special envoy to the country warned on Thursday.

Oil-rich Libya descended into chaos after the NATO-backed overthrow of leader Muammar Gaddafi in 2011. It has been divided since 2014 between an internationally recognized government in the west and a rival administration in the east that has established its own institutions.

The division of the central bank, combined with the lack of a unified budget, led to both branches racking up debt to finance their respective administrations, U.N. special envoy to Libya Jan Kubis told the U.N. Security Council.

"Managing this debt is only possible if the central bank unifies. In plain terms, Libya's banking system will likely collapse, absent unification," Kubis said.

An international audit of Libya's parallel central bank branches last week recommended steps that could lead to their eventual reunification. Kubis told the Security Council that the main finding was unification "is no longer simply recommended but required".

Any reunification of the central bank is expected to help improve confidence among buyers of Libyan oil at a time when prices of the country's main export are rising.

Oil revenue has flowed through the Tripoli-based Central Bank, which has paid the salaries of many state employees across front lines. Libya's oil exports were hit by a blockade by eastern-based forces last year, leading to lost revenues.

A U.N.-led peace process in Libya brought a ceasefire last year and then a unity government was formed. However, talks this month aimed at paving the way for elections in Libya in late December stalled.

"I'm concerned that although the ceasefire agreement continues to hold, notwithstanding minor clashes between armed groups and criminal gangs, the unity of the JMC (Joint Military Commission) and implementation of the agreement could unravel if the political process remains stalled," Kubis said.

French Foreign Minister Jean-Yves Le Drian, who chaired the Security Council meeting on Thursday, said the elections must be held in December and foreign forces must leave Libya, a call echoed by several council members.

"It is high time to implement a progressive, balanced and orderly timeframe for the for departure of foreign elements from both from the two camps," Le Drian told the 15-member council.

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Diplomats said last month that Turkey and Russia, which back opposing sides in Libya, had reached an initial understanding on a step-by-step withdrawal of foreign fighters backed by them.

Libya's new unity government Prime Minister Abdulhamid Dbeibah said the presence of foreign mercenaries "remains the most important obstacle to stability in Libya."