European banks are supposed to be deleveraging. By now, most realize they are headed the opposite direction. In Spain, the increased leverage is pro-cyclical, 100% certain to cause a bigger problem down the road.

Here is a Mish-modified translation of an El Economista article on Spanish Bond Purchases.

Financial institutions have become the main investor in Spanish government bonds after foreigners withdrawn €89.6 billion in the first eight months of the year, according to Treasury data.

In these eight months, Spanish exposure has risen €108.8 Billion, a record 106.84% increase.

Meanwhile, foreign investment in Spanish debt has dropped 31.8% during the same period, standing at €191.836 billion euros, compared to €281.439 at the end of 2011.

This is the second consecutive time since 2008 that the debt in foreign hands is below the €200 billion.

Banks are now the main investor, ahead of foreigners, accumulating now 34.07% of the public debt, compared to 33.49% by foreign investors. This situation has not occurred since 2003.

Mike “Mish” Shedlock/