Portuguese PM: Greek default would be disaster

Portuguese Prime Minister Pedro Passos Coelho does not rule out the possibility of a Greek default and warned that such an eventuality would have a "disastrous" impact on Portugal.

"We are on the brink of a situation of great uncertainty, not to speak of a possible default," Passos Coelho said late Tuesday in an interview with state broadcaster RTP. "That could have disastrous consequences for Portugal, particularly in terms of funding for banks and the economy."

In the event of Greece being unable to service its debt, Passos Coelho said Portugal should brace itself for the possible need of a second rescue package as is the case of the Hellenic country.

A failure to prepare for a Greek default second rescue package for Portugal would be "irresponsible," Passos Coelho said. "It is important that in this scenario [...] that the rest of the European countries and the IMF believe it is worthwhile helping Portugal," the prime minister said. The government has embarked on an austerity drive aimed at trimming its budget deficit to 5.9 percent this year from 9.1 percent last year.

The Greek government on Wednesday approved further austerity measures, including the temporary layoff of 30,000 civil servants and a 20-percent cut in state pensions of over 1,200 euros.

Passos Coelho said Portugal needed to avoid instances such as that of the island of Madeira revealing last week that it had not informed the central government of its total debts. "We are not talking about a very big [financial] impact," Passos Coelho said. "But what the Madeira case involves hits Portugal's reputation."

Portugal was the third country after Greece and Ireland to receive rescue funding from the IMF and the EU, which in Lisbon's case amounts to 78 billion euros.

Despite external assistance, Portugal's borrowing costs rose at a debt tender held Wednesday fueled by growing concerns of a Greek default, with the yield on six-month bills moving above five percent.