Well, I had been warning this would happen. Credit default swaps measuring risk on five-year sovereign German debt touched 90bp yesterday and look set to rise above French debt for the first time in the near future. The current spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5% this year as industrial exports collapse at the fastest pace since the Great Depression. I have been warning about this looming problem in my EU Bonds posts for some time now. Germany’s export driven economy is heaviliy dependent on fluctuations in world trade, and German industry is very dependent on Eastern Europe (which is more or less the focal point of the current global crisis at this stage). In addition, German savings went to fund investments in many of the riskiest assets, hence the need for a very large bank bailout. So moving forward things do not look that marvellous for German public debt, and another wave of health and pension reforms will now need to be put in the works as the population ages rather more rapidly than is desireable for stability.

Strangely, and again as I have been pointing out, despite an evident lack of substantial reform in recent years, France’s economy is preforming noticeably better than Germany’s, and the reasons for this will surely form part of the post crisis post-mortem.

Some indication of the headaches which are now looming, and of the fact that the market for German debt may not be as liquid as many had imagined, can be found in the statement from the Head of the German Federal Finance Agency this morning that Germany may increase sales of short-dated securities at the expense of longer-term or index-linked bonds if government borrowing rises more than forecast this year. Carl Heinz indicated that Germany was fortunate in this sense since the appetite for debt maturing in 12 months or less is “huge” as money managers are currently rather reluctant to deposit cash with banks. Germany will need to sell more debt this year than at any time since the end of World War II as Chancellor Angela Merkel increases spending to cushion the economy against recession, and the government plans to sell a record 323 billion euros ($414 billion) this year, almost 50 percent more than the 220 billion euros sold last year. The issuance will comprise 149 billion euros in bonds with maturity over one year and 174 billion euros of shorter-dated money-market securities.

So I think we should forget about stereotypes here, since this whole situation is now extremely fluid, and, of course, in need of rapid attention from EU leaders . Maybe instead of asking ourselves whether Germany can bail-out Ireland the question we should be asking ourselves is whether Portugalcan bail-out Germany?

And in case some of you simply think this is a joke, be careful what you ask for, since David Beers, head of sovereign ratings at Standard & Poor’s told Reuters this morning that the weakness of the global economy could be expected to have an impact on some countries’ credit ratings, and that he expected more sovereign ratings downgrades than upgrades this year, especially in the light of financial market concerns about the health of public finances.