* Says outlook reflects fiscal cost of bank restructuring
* Euro trims gains vs dollar on rating revision
(Adds background, euro reaction)
NEW YORK/MADRID, March 4 (Reuters) - Ratings agency Fitch put Spain’s sovereign rating on watch for a possible downgrade on Friday, citing risks stemming from fiscal consolidation, bank restructuring and a weak economic recovery.
Fitch praised the Spanish government’s structural reforms in the areas of state pensions and the labour market, but said the long-term impact of restructuring of the country’s savings banks in particular posed risks to the sovereign’s AA-plus credit rating.
“The negative outlook reflects the downside risks to Spain’s sovereign credit profile from a weak economic recovery, banking sector restructuring and fiscal consolidation, especially by regional governments,” Douglas Renwick, sovereign credit analyst at Fitch, said in a statement.
The euro pared most of the day's gains against the dollar after Fitch's move, falling to $1.3965 EUR=EBS.
Spain has been under intense market scrutiny in recent months on concerns about the debts of its banking system which have raised fears Madrid may eventually have to follow Ireland and Greece and seek an international bailout.
Spain approved a decree last month spelling out new capital requirements for its banks in a move to dispel fears about the stability of its financial system after a credit-fuelled property boom and bust. [ID:nLDE71H0KD]
The government estimates a 20 billion euro capital shortfall in the banking system, but analysts say the funding gap could run as high as 120 billion euros.
Fitch’s revision to Spain’s credit outlook comes a day after European Central Bank President Jean-Claude Trichet surprised markets by signalling a rise in the bank’s benchmark rate as early as next month. [ID:nECBNEWS]
Spain and other periphery economies such as Ireland and Greece are most vulnerable to the tightening cycle, given their high percentage of floating rate mortgages and fragile banking sectors.
Spain is rated one notch lower at AA by Standard & Poor’s, while Moody’s Investors Service rates the sovereign at Aa1, similar to Fitch. Moody’s also has the rating on watch for a possible downgrade. (Reporting by Daniel Bases and Pam Niimi; additional reporting by Judy MacInnes in Madrid; Editing by Dan Grebler and Susan Fenton)