While everybody's rightly worried about Spain as the next likely victim of the European debt crisis, nobody's thinking much about Germany. It could be in more trouble than we realize.

That's the message of a presentation making the rounds Tuesday on Wall Street by Carmel Asset Management, a New York investment firm. Entitled "Achtung Baby: Germany Is Riskier Than You Think," the presentation points out that Germany has been the sponge soaking up Europe's debt problems for more than two years now -- and that it helped finance the debt booms in Greece, Spain and other peripheral European countries that led to the eventual bust. This is all bad news for Germany's long-term financial health, Carmel warns.

"Periphery debt is now the Federal Republic of Germany’s problem," Carmel writes in the presentation, which is available in full at the Zero Hedge blog.

Typically when Germany is mentioned in relation to the rest of the eurozone, it is the Debbie Downer who won't let anybody do anything fun, like stimulate the economy or issue joint European bonds. Its fever for austerity has helped investors think of it as an uber-safe haven. That's one reason its two-year debt yields recently turned negative: Investors are so desperate for Germany's perceived safety that they're willing to actually pay money to let the German government hold their money for safekeeping.

But Germany is not immune, Carmel warns. It is getting punished in four very specific, very awful ways:

  • Germany's central bank, the Bundesbank, has taken on the burden of some of the bad debts of struggling European countries, as a result of being the primary cash source for repeated eurozone bailouts.
  • The Bundesbank is also suffering from the bad debts of German private banks that loaned to struggling countries.
  • German banks that still have those bad debts on their books are suffering, too.
  • Germany's export-driven economy is taking a hit from the slowdown in trade accompanying Europe's rolling financial crises and recessions.

Germany has two choices that will both be painfully expensive, Carmel writes: Stay in the eurozone and bail it all out, or let the eurozone collapse.

The first option, which will result in what George Soros recently called a new German empire, will cost 579 billion euros, according to Carmel's estimate, or about $720 billion. It will involve 419 billion euros in bailout funds, another 80 billion euros in private bank losses and an extra 80 billion euros in lost exports.

But all of that will be better than letting the eurozone break up, Carmel figures. In that case, Germany will still lose 94 billion euros in bailout costs, a whopping 200 billion euros in bank losses and 375 billion euros in lost exports, for a total cost of 1.31 trillion euros, or $1.63 trillion. That's a lot of schnitzel.

The answer seems obvious, then: Bail out the rest of Europe and save about 600 billion euros. But bailing out the eurozone will involve some politically unpopular compromises on the part of the German government. German voters consider themselves harder workers than, say, the Greeks -- sort of incorrectly! -- and haven't been super thrilled about spending their hard-saved cash to bail out countries they see as relatively lazy.

A new poll by Stern magazine found that 49 percent of Germans want Greece to leave the eurozone, while only 30 percent want it to stay, according to Reuters. And yet a Greek exit from the eurozone could lead to a bigger breakup of the union, which could cost Germany even more, if Carmel is correct.

This political tension means that the crisis could drag on longer than it needs to, with other countries in Europe dragging Germany kicking and screaming into a tighter union. In any event, the costs to Germany will keep running higher, and for the moment financial markets don't seem to realize it. The cost to buy insurance against a German default in the credit derivatives market is relatively cheap, and Germany has the lowest borrowing costs of any developed nation. Something's got to give, Carmel warns.

"The market underestimates the risk to Germany posed by its exposure to periphery debt," Carmel wrote.

Carmel recommends buying default insurance -- not because Germany is at any risk of defaulting, but because the price of such insurance could get a lot higher in a big hurry.