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UPDATE 1-Greece blames Germany for "racial approach" on aid

* Greek deputy PM blames German hard line on prejudice

* Sees Portugal next in debt crisis line

LISBON, April 5 (Reuters) - Germany’s hard line on aid for Greece has been based on a “moral, racial approach” and the prejudice that Greeks don’t work enough, Greek Deputy Prime Minister Theodoros Pangalos told a Portuguese newspaper.

Pangalos, who accused Germany earlier this year of not properly compensating Greece for World War Two occupation, also told the paper that German leaders were too focused on catering to domestic voters at a time when the European Union required solidarity.

Polls show Germans are overwhelmingly against a financial bailout for Greece and Chancellor Angela Merkel ensured at a summit in Brussels last month that tough conditions were attached to any such aid.

“Some countries like Germany have taken a moral approach to our problem,” Pangalos told Jornal de Negocios in an interview conducted last week.

“The Greeks have problems. Why do they have problems? Because they don’t work enough. And why is that? Because they have a good climate, music and drink and they are not as serious as the Germans,” he added.

Pangalos said this approach was “ridiculous” and failed to take into account strong productivity gains in Greek industry and agriculture.

“This is a moral, racial approach that does not correspond to reality,” he said.

The German government declined to comment on the report.

It previously dismissed Pangalos’s remarks about war compensation saying it had paid that as well as billions of euros in aid. The outspoken Greek politician has also accused Germany of withholding aid because its banks and exporters were profiting from Greece’s crisis, remarks also rejected by Berlin.

Pangalos described the financial safety net deal for Greece agreed by EU leaders on March 25 [ID:nLDE62N2R1] as a “good step forward”, but said it should have been more straightforward.

AID AS LAST RESORT

Under the deal, aid would only provided to Greece if it was unable to access credit markets.

Merkel also insisted that the International Monetary Fund (IMF) play a role in any rescue, angering some EU partners who would have preferred the bloc to handle the problem on its own but winning praise from the media in Germany.

“This is politics and politics has always been about what the people voting want to hear,” Pangalos told the paper.

“But we should try to limit, as much as we can, our natural tendency to satisfy our citizens and concentrate on the economic reality. And what this economic reality tells us is that the EU needs solidarity and a correction mechanism,” he said.

Referring to an opinion poll in February that showed a majority of Germans wanted Greece expelled from the euro zone, Pangalos said that although it was not a scenario his country wanted, “Greece will always exist, as we have existed for 8,000 years, out of the euro and EU”.

He said the sort of debt problems seen in Greece were likely to spread further in the euro zone and Portugal could be the next victim.

“You are the next victims ... I hope it doesn’t happen and the solidarity prevails and we find an exit from this escalation (of borrowing costs). But if this does not happen, the next probable victim will be Portugal,” he said.

“What happened to us (Greece) now is because we are in a worse situation, but it could also happen in Spain and Portugal,” he said.

Because of its weak growth, a lack of competitiveness and a budget deficit that surged to 9.4 percent of GDP last year, Portugal is seen as one of the euro zone’s most vulnerable economies should Greece’s debt crisis spread to other members of the currency area.

But the premium it costs Portugal to borrow is still roughly three times lower than that of Greece, and its projected debt-to-GDP ratio for this year of 86 percent is much lower than Greece’s ratio of roughly 120 percent.

Editing by Noah Barkin

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