* Benchmark could be phased out and replaced
* Worried banks refuse to contribute to Euribor rate
* Change complex because of multi-trillion euro role
* Banks, ECB officials to talk early next month
By John O'Donnell and Marc Jones
BRUSSELS/LONDON, June 26 One of the globe's leading financial benchmarks, Euribor, could be phased out and replaced within a year as a growing number of banks distance themselves, people familiar with the plans said.
A group of 60 of the world's top banks will consider this option and the shape of an alternative benchmark when they meet with top officials from the European Central Bank in Brussels early next month.
"In nine months time, there may no longer be a Euribor," said one source familiar with plans to replace the benchmark that gauges how much banks pay to borrow from peers.
"There are two scenarios," said a second source. "You put a new benchmark next to the 'estimated' Euribor. The other option is that you replace the current Euribor ... in the near future."
He said a 'Euribor 2.0', based partly on bank estimates on the price of borrowing as well as actual market rates, could be in place as soon as this Autumn.
"That would be the ideal situation but we must see whether there are legal risks," he said.
The prospect of phasing out or replacing the benchmark, which is as old as the euro currency, underscores the wider difficulty facing financial markets, where reluctance to lend makes it hard to estimate the true cost of borrowing.
It also highlights a growing sense of alarm over the future of the Euro Interbank Offered Rate, as the number of banks willing to give the lending-cost estimates on which it is based dwindles.
Any change to a benchmark, used as the basis for pricing 250 trillion euros of financial contracts from Spanish mortgages to complex derivatives, is highly sensitive. If mishandled, it could cause widespread difficulties in the banking system and further undermine confidence in its transparency.
Under investigation for possible rigging alongside Libor, its larger sterling counterpart, the benchmark's organisers are concerned that more banks, worried about the reputational risk of staying involved with the benchmark, will quit, triggering its unravelling.
Citi, Rabobank, UBS and a number of German banks have all pulled out over the last year. Should others follow, it could lead to a "catastrophe", in the words of one person familiar with the situation.
The ECB has publicly appealed to banks to stay involved with Euribor but many remain concerned.
The European Union's antitrust chief Joaquin Almunia is expected to deliver his verdict on whether banks rigged the benchmark in the second half of this year.
To compound its difficulties, Euribor relies on banks' estimates to calculate the cost of lending.
Its organisers want to change this by launching a new version of the benchmark which combines the real price of short-term interbank loans together with estimates for longer-term credit beyond three months.
Francesco Papadia, former head of the European Central Bank's financial market operations who now works with think tank Bruegel, said the exit of banks from the Euribor rate-setting panel was already a problem.
"It is not that a dwindling number of participants will generate panic," he said. "This is more a case of long-term illness than sudden heart attack, but one with serious consequences.
"This would touch the entire money market. The problem would be for banks, their customers, for regulators and also the ECB."
The ECB, keen to avoid a messy collapse, has been working with its organisers behind the scenes to see if a new benchmark, based solely on actual market transactions rather than bank estimates is workable.
A pilot study carried out in recent months looked at banks' trading records but confirmed most experts' suspicions that there is too little interbank lending to make such a yardstick reliable.
That means a 'hybrid' rate - where bank estimates are used when market activity is too slow - is the only feasible option.
Although the main debate will take place in Brussels in the coming weeks, the ECB and the two dozen banks in its so-called "money market contact group" discussed the situation recently at a meeting in Helsinki.
Many participants expect a new EU law to oblige banks that trade on the money market to contribute to Euribor, a move which would create a panel of about 50 banks. Making this mandatory, however, could take years.
Switching the basis of calculation from estimates to a mix of estimates and prices could be difficult because trillions of euros of products use the benchmark as a reference point. Changing the formula could invalidate those legal contracts.
One option favoured by the ECB is to run the two types of rate side by side. Any transition to the new rate could be managed over a couple of years, something the ECB has experience with having switched the currencies of 17 countries to the euro.
Thomson Reuters continues to support the calculation and distribution of Libor on behalf of the British Bankers Association while the British government conducts its tender for a new administrator. Thomson Reuters supports the calculation and distribution of Euribor on behalf of the European Banking Federation. (Reporting By John O'Donnell and Marc Jones, editing by Mike Peacock)