"We face a brutal liquidity squeeze in Europe, not because the ECB is not providing it (liquidity) but because there is a lack of trust," Ricardo Salgado told a conference.

Portuguese banks lost access to wholesale financing markets as the sovereign debt crisis deepened in Europe's periphery and its banks have become dependent on ECB funds for liquidity.

Salgado, head of Portugal's largest bank by market capitalisation, said that December's ECB operation, which provided European banks with an unlimited quantity of three-year funds, did not work, as more than 90 percent of the cash was deposited back to the ECB instead of being used for lending.

"This shows that the European banking system is not working, it is not lending and it is not just Portuguese banks, its Europe's banks," the CEO said.

The terms of a 78 billion-euro EU/IMF bailout for debt-ridden Portugal includes a 12 billion-euro financing line which banks can access to meet the goal of achieving a core Tier 1 capital ratio of 10 percent by end-2012. BES's core Tier 1 was around 9 percent in December.

(Reporting by Sergio Goncalves, Shrikesh Laxmidas and Filipe Alves; Writing by Daniel Alvarenga; Editing by Greg Mahlich)