Greek default could be disaster for Portugal: PM

(Reuters) - LISBON, Sept 20 (Reuters) - A debt default by Greece could have disastrous consequences for Portugal, which must take steps to avoid the fall-out from such an event, Prime Minister Pedro Passos Coelho said on Tuesday.

Passos Coelho, whose government is rushing to differentiate Portugal from Greece in its efforts to meet the terms of its own bailout from the European Union and IMF, said the possibility of a Greek default could not be ruled out.

"We are on the edge of a situation of great uncertainty, if not to speak of the possible default by a state," Passos Coelho told RTP television in an interview, referring to Greece.

"This could have disastrous consequences for Portugal, above all in terms of financing for banks and the economy," said Passos Coelho, whose center-right government came to power just as the country started receiving bailout funds in the summer.

Some economists have said Portugal is likely to be hit hard by financial contagion if Greece defaults on its debts. Portugal, with a 78 billion euro bailout, was the third euro zone member to receive rescue funds after Greece and Ireland.

Passos Coelho said it was crucial to ensure Portugal met the budget deficit targets required for the bailout. The government is doing this through sweeping spending cuts and tax rises which have pushed Portugal into a deep recession.

Passos Coelho said the government would be "irresponsible" if it was not prepared for a possible default by Greece.

"It is important that the country understands the state of emergency we are in," he said. "If we don't control the deficit we won't be here to tell the story."

The government has to cut the budget deficit to 5.9 percent of gross domestic product this year from 9.1 percent in 2010.

It is especially important to show a determination to achieve economic goals under the bailout to ensure that European countries do not walk out on Portugal, Passos Coelho said. "It is important that our partners know that it is worthwhile helping us," he said.

Passos Coelho said that was why it was important to avoid incidents like news this week that the island of Madeira had failed to report its full debts to the central government in Lisbon.

"We are not talking about a very significant (financial) impact" from Madeira this year, he said. "But what the Madeira case implies is a cost for Portugal's reputation."

(Reporting by Axel Bugge and Sergio Goncalves, editing by Tim Pearce)