Debt guarantee seen key to UK bank rescue package

By Catherine Evans

LONDON (Reuters) - The government's offer to guarantee new debt issuance by banks may be key to the success of its multibillion pound package to shore up the financial system, credit analysts said on Wednesday.

The Treasury said it will inject 50 billion pounds of emergency capital into banks left reeling by the global financial crisis and will extend 250 billion pounds in guarantees to help them refinance senior debt.

"Taking part -- with preference shares or PIBS -- makes a bank eligible for a government guarantee of maturing senior liabilities. This is the critical part as it should begin to free up UK interbank markets," said Nigel Myer, banking credit analyst at Dresdner Kleinwort, in a research note.

"Without that lifeblood, the banking system and economy could freeze. In the near term the liquidity support is way more important than the capital injection."

The government's move follows days of pressure on British banks, some of which lost nearly half their value on the stock market amid investor fears they could collapse if they were not handed a massive liquidity lifeline.

The scheme will entitle participants who commit to increase their Tier 1 capital -- the main measure of a bank's financial strength -- to a government guarantee on short and medium-term debt issued to refinance maturing liabilities.

Banks already signed up include Abbey, Barclays, HBOS, HSBC, Lloyds-TSB, Royal Bank of Scotland, Standard Chartered and Britain's largest building society, Nationwide.

"The proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months, in any of sterling, U.S. dollars or euros," a Treasury statement said.