One of the big lessons of the last four years is that state bail-outs of banks and bondholders are a bad idea. They usually just make things worse.
All that happens is that the state takes the banks' debts on to its own balance sheet. You then end up with a sovereign crisis instead of a banking one.
So far, that's exactly what's happened to Ireland and Spain. Dublin's original decision to stand behind the debts of its six major banks seemed like a good way to stop a bank run at the time.
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But it ended up wrecking the national finances, forcing the Irish to seek help from the European Union (EU) and the International Monetary Fund (IMF). Similarly, Spain's decision to bail out its banks with money from the EU has pushed up both debt levels and bond yields.
Now the crisis may be entering a new phase. The new fear is that Germany and other northern European countries will be made liable for the debts of their insolvent neighbours the periphery' countries.
This would come about either through more Spanish-style deals, or through 'Eurobonds'. Under the latter scheme, countries would be able to issue debt backed by all members. Both of these schemes would increase German exposure to troubled sovereigns.
In a sign that the market is starting to worry about this possibility, the yields on ten-year bunds (German government debt) have risen to 1.5% after falling to as low as 1.17% at the end of last month. The cost of default insurance also rose above 100 basis pointsat the end of last month, for the first time this year.
Does this mean that Germany is no longer a 'safe haven'? Could Angela Merkel even end up begging for a bail-out? And what does it mean for you?
Germany has only itself to blame
It's hard to feel sorry for Berlin. You can see why ordinary Germans might be annoyed about the idea of bailing out taxpayers (and non-taxpayers) in other countries.
But as we've pointed out, it was Germany's Landesbanken, and other state banks, that made many of the worst lending decisions. German politicians knew this. Instead of dealing with their own banking sector, Germany then tried to get others to pay the bill, browbeating the Irish government (via the European Central Bank - ECB) into maintaining its bank guarantees.
After it was clear that this was not going to work, Germany then threw good money after bad, with the Greek, and now Spanish, bail-outs. If they default, the German state will be liable for its share of the losses on the EU loans.
Paranoia about inflation has also led the Bundesbank to push against interest rate cuts and money printing. This is despite the fact that the annual growth in the eurozone money supply is now only 2.5%. Ironically, between 1974 and 1997 the Bundesbank had an explicit monetary target that required a much higher rate of growth. This means that Jens Weidmann is trying to get the ECB to be more German than the Germans.
Germany can't even live up to its own fiscal promises. Even though it has pushed austerity policies as the solution, in turn hammering growth in the eurozone, it is itself still running a deficit. Indeed, it recently admitted that it had missed its own targets for spending cuts.
As the main opposition party has put it: "Merkel dictates sweeping austerity to our European partners, but fails to save in her own budget". If Berlin has to bail out its own banks, or if a fall in exports sends Germany into recession, you can expect this deficit to rise further.
This problem is being exacerbated by the challenge of dealing with public sector pensions. As we've pointed out, a Freiburg University study has estimated that while British public sector pension liabilities total 90% of GDP, Germany tops the league table with a whopping 360% of national income. This means that the real level of total German debt could be over five times greater than the 81.2% debt of GDP ratio that is usually used.
What does this mean for investors?
Even though a German default is still very unlikely, German debt is certainly not a risk-free investment. Even its relative status as one of the three 'safe-haven' sovereign investments (along with the UK and US) is under attack.
Now, we've not been keen on safe haven' bonds from the big developed economies in general for quite some time. They're hugely overvalued, and an investment accident waiting to happen.
So do any European sovereign bonds look attractive? If you really had to invest in a eurozone sovereign, you could consider Finland. As Moody's point out in their latest report, Finland has a strong fiscal track record, having "never breached any of the Maastricht criteria, even when its economy contracted by more than 8% in 2009". Gross debt comes in at just over half of GDP. One exchange-traded fund that allows you to invest in Helsinki is iShares Barclays Finland Treasury Bond fund (LSE: IFTN). It has a flat yield of 3.18% and a yield to maturity of 1.18%.
But that's hardly a great yield, and while it's not guaranteed, the euro probably has further to fall against the pound. Is there a more attractive alternative? One option is Norway. Last year my colleagues Eoin Gleeson and Sean Keyes suggested investing in the country. Thanks to oil and natural resources it has a big surplus, while its sovereign wealth fund provides further security.
While it has cut rates to prevent the Norwegian krone from getting too strong, they are still at 1.5% - the same as the ECB's. However, with house prices increasing fast, the bank is likely to be forced to reverse its policy quickly, allowing the krone to appreciate.
This makes the temporary fall in response to the cut look like a potentially attractive opportunity. One fund suggested by the Zurich Club newsletter is Nordea Norwegian bond fund, available through Redmayne Bentley (0113 243 6941).
Don't make the mistake of thinking that either of these options is risk-free for sterling investors, both come with currency risk for one thing. But either option looks a better bet for the bond component of your portfolio than German debt, certainly.
