UPDATE 2-Portugal adjustment would suffer if no summit deal-PM

Tue Oct 25, 2011 12:02pm EDT

* Reiterates bailout targets to be met

* Country has to avoid seeking second bailout like Greece

* Bailout has enough money for bank recapitalisation

By Sergio Goncalves

LISBON, Oct 25 (Reuters) - Portugal's growing efforts to rein in its deficit and debt may suffer setbacks if this week's euro zone summit fails to come up with a solution to Greece's debt crisis, Prime Minister Pedro Passos Coelho warned on Tuesday.

He told a conference that Portugal expected such a solution from the summit, and said that Europe needed to move towards an economic union to be able to take decisions quickly and ride out its woes.

"We expect the extraordinary euro zone summit to find a solution for Greece's situation. Without this solution we won't have financial stability in Europe and countries like Portugal will have more difficulty," he said.

Portugal was the third country in the euro zone to need a bailout, after Greece and Ireland.

Leaders of the 17 euro zone countries will meet in Brussels on Wednesday to prepare a strategy to try to resolve the region's debt problems. Still, euro zone officials say the leaders are unlikely to provide many hard numbers to flesh out the debt crisis response.

Passos Coelho said that while a lot depended on wider European decisions, Portugal was focussed on meeting the goals set out in a 78 billion euro EU/IMF bailout, including slashing the budget deficit to 5.9 percent of GDP this year from last year's 9.8 percent and then further to 4.5 percent in 2012.

He reaffirmed his government's commitment to meeting the goals despite a shortfall discovered in the first half of the year and a further expected fiscal revenue shortfall in the second half, which he did not detail.

He said he will seek a primary budget surplus in 2012, referring to budget accounts when interest payments are stripped out.

"We have now to meet our targets if we want to be taken seriously and if we don't want to find ourselves on the edge of an abyss again," he said.

"If we remain a country lacking financial discipline, the price to pay will be too high from the social, economic and political point of view," he added.

As for European banks recapitalisation needs -- another key point to be mulled at the summit -- Passos Coelho said a 12 billion euros credit line for banks included in the country's bailout will be enough to recapitalise Portugal's lenders.

"We have an advantage in Portugal as we already have a solution for this recapitalisation, while other countries still have to find other solutions... we know that the 12 billion euro line we have in the programme will be sufficient."

Most Portuguese banks have said they had no plans to draw on the loans, which entail the state taking stakes in banks. But the premier said it was unlikely that all would manage to avoid recapitalisation. He said the state would be a silent partner in such a case, only providing recommendations on key issues.

He said the country must avoid reaching a situation of having to seek another bailout loan from the European Union and IMF like Greece and should instead ensure it meets the goals of its current bailout. He has said previously that a Greek debt default could force Portugal to seek a second loan.

"What we want is to adjust our programme to reality, not to seek a new programme," Passos Coelho said, referring to the fact that his government already had to take more measures than planned under the May bailout agreement to tackle shortfalls that have been discovered.

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