European Market Manipulation, Today's Episode: Spanish Treasury Bonds

The process of celebrating every successful auction of government borrowings is by now a familiar feature of financial markets.  The more financially stressed a treasury is, more they celebrate those oversubscribed (technically more demand than supply) auctions.

Today, the Spanish treasury successfully borrowed a few billion euros in the markets.  As is now customary, the financial press pointed out that the auction was oversubscribed which surely signals that the free markets have a lot of confidence in Spain's ability to repay its debts.  Never mind that:

1. The rates continue to go higher
2. Many large investors are selling all their Spanish holdings (click here for an example we could only find in Spanish about Norway's US$500 billion+ fund reducing their Spanish debt)
3. The EFSF has been recently rumored to maybe be enlarged to...buy Spanish debt
4. The ECB is publicly in the markets...buying Spanish debt

So who bid in this oversubscribed auction if everyone is selling?  Nobody knows for sure.  However, the likely suspects are Spanish banks who can get very cheap financing from the ECB to lend, at a profit, to the Spanish government.  Not precisely what we would call an informed unbiased investor since the banking executives making the decision do not even use their own money.

In case this story rhymes with something you may have read, here is another one about Greece also borrowing cheaply.  (With apologies for we have now decided to cross the threshold or arrogance and quote ourselves).