By the Financial Times

As the Spanish prime minister reveals plans for an overhaul of the country's network of debt-soaked savings banks, he will be hoping to reassure anxious investors that Spain is not heading for an Irish-style banking meltdown.

Since the financial crisis began, Spanish officials and bankers have boasted of the relative strength of their banking system compared with those of the UK, the US and Germany. But the parallels between the troubles that have afflicted Spain's regional savings banks - or cajas - and those that brought down Ireland's banks are hard to overlook.

The problems stem from an aggressive expansion into commercial property and construction when the market was booming - and the severe losses triggered when those loans went bad.

Like the Irish banks, many cajas lent heavily to property developers, builders and homebuyers in the pre-crash years. Some of the most aggressive cajas doubled or even tripled their balance sheets during the boom years.

Since then, property prices have collapsed, debtors have fallen into bankruptcy, and bad loans have shot up, leaving many cajas in dire need of fresh capital.

"The system is sitting on probably 1.5m homes that need to be sold - that's the glut," says David Stix, a Madrid-based stockbroker and property expert. "Some of these banks have been forced to repossess these homes and have them on the balance sheet."

According to the Bank of Spain, the "potential troubled exposure" to construction and real estate amounted to €180.8bn ($241bn) in mid-2010, with banks prepared for losses on only a third of that sum.

But the cajas' woes are seen as less of a threat to Spain than the Irish banks' troubles were to Ireland, largely due to the comparative size of the economies.

"Real estate prices haven't fallen as much in Spain as they did in Ireland so there are still loses to come out," says Daragh Quinn of Nomura bank. "However, the relative size of the problem both for the banks and relative to gross domestic product are smaller in Spain so should be easier to deal with."

Analysts point out that the amount needed to bail out the cajas, which could be up to €90bn in a stressed scenario, would represent less than 10 per cent of GDP, while that needed in Ireland was about 30 per cent of GDP.

Also, Spain's two biggest banks, Santander and BBVA, and La Caixa, the largest caja, are in comparatively good shape. It is the smaller, regional banks that have really suffered. In contrast, the three biggest Irish banks are now partly or fully nationalised and one is being wound down.

Spain's banks, while aggressive lenders to commercial property, have not been as exposed to the sector as the Irish banks. The entire loan book of Anglo Irish Bank, for example, was made up of commercial property, compared with analysts' estimates of about a quarter for Spain's banks.

However, this has re­sulted in less government urgency to clean up the cajas. While it has already embarked on a significant restructuring of the sector, the new recapitalisation plans show just how much more pain there is to come.