It has all the elements of a good spy novel: clandestine money transfers, political intrigue, diplomatic wrangling and a smoking gun. Switzerland's "cold war" with Germany over bank secrecy has just taken a turn for the worse.

Swiss prosecutors have issued arrest warrants for three German tax investigators on suspicion of spying. The tax officials were allegedly involved in the purchase of CDs full of stolen data -- the smoking gun -- relating to secret bank accounts held by German clients of Credit Suisse Group AG in February 2010. The diplomatic spat threatens to torpedo a German-Swiss tax agreement, scheduled to take effect in nine months if approved by parliament, that would allow customers to maintain anonymity for their Swiss accounts while paying a withholding tax to German authorities.

Germany's Social Democrats shot themselves in the foot on Friday by declaring the Swiss tax pact dead. While the Social Democrats are publicly promising to raise the top income-tax and capital-gains rates if elected in 2013, they are now happy to forgo the fiscal windfall from the estimated 150 billion Swiss francs ($125 billion) that Germans hold in Swiss bank accounts.

"The federal government must protect the German tax investigators and take action against the Swiss arrest warrants," Thomas Oppermann, the parliamentary group leader of the Social Democratic Party, said in an interview with the Bild newspaper. "The government should nominate the tax investigators for the German Order of Merit."

Finance Minister Wolfgang Schaeuble, who is more adept at counting in trillions than billions these days as he helps erect a firewall big enough to protect the euro, tried to salvage the situation by showing understanding for Switzerland's legal right to bank secrecy. This only enraged the Social Democrats, making ratification of the tax agreement less likely.

The "tax-the-rich" Social Democrats are compromising their own political platform in order to prevent Schaeuble from claiming victory with a successful tax agreement as state elections loom. The big fish that the Social Democrats target at home will only get bigger if they are allowed to swim below the radar in the absence of an international tax pact. Politics may still end up hiding Switzerland's dirty laundry, after all.

(David Henry is a Frankfurt-based editor for Bloomberg View.)

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