The prediction yesterday by José Luis Rodríguez Zapatero, the Spanish prime minister, of mergers among the country’s weaker banks merely brought into the public domain a looming reality accepted months ago in private by Spanish bankers.

'When there’s a time of grave crisis like this, it’s likely that there will be merger situations and restructurings not only in Spain but in other countries as well,' Zapatero told parliament.

Although Mr Zapatero blamed the international financial crisis, and although the resultant seizing up of the interbank lending market has indeed worsened the difficulties of Spanish banks, the underlying reason for Spain’s domestic banking problems is the spectacular collapse of the local housing market.

Many of the 45 unlisted cajas, as Spanish savings and loans institutions are known, are heavily exposed on two fronts: first to property developers unable to sell new apartments and houses, and secondly to individual mortgage holders who find it hard to repay their debts as the economy falls into recession and unemployment rises.

According to Tinsa, the Spanish property appraiser, Spain’s stock of new, unsold residential properties is likely to reach 920,000 by the end of this year. Property developers and cajas focused on the Mediterranean coast in eastern and southern Spain are particularly exposed.

The strongest financial groups – including BBVA and Santander, the two biggest and most international banks, and Caja Madrid and La Caixa, the two largest cajas – are expected to weather the storm with minor damage at worst.

Financial Times