Montreal, Canada

It was no surprise to most market participants that Germany and the European Central Bank (ECB) announced a meeting tomorrow in Brussels to discuss debt guarantees and bridge-financing for ailing Greece. The EUR got a small boost after the announcement while credit spreads on German/Greek issues narrowed for the first time in weeks.

The Germans have a vested interest in a de facto Greek bail-out. German banks are saddled with about €500 billion ($685 billion) in loans to Greece, Ireland, Portugal and Spain – the biggest violators based on relatively high debt-to-GDP ratios. It doesn't take a rocket scientist to figure out that a bail-out was almost a sure thing.

The German Bundesbank, or central bank, must be reeling over the last several months because its hard-money advocates never wanted to join the single European currency in the first place.

Several Bundesbank officials in the late 1990s voiced concerns about tieing monetary policy into a "one size fits all" model, correctly pointing to the failure of the euro's predecessor, the ERM, or the European Exchange Rate Mechanism, which blew up in September 1992 when the British pound and Italian lira were devalued.

Alas, the credit crisis continues in 2010. Only now, governments are the target as speculators move in for the kill.

Bank bailouts, now firmly underwritten by governments in the West since late 2008, will seem petty compared to bailing-out sovereign states. Weak credits like Greece are getting blank checks by stronger sovereign nations like Germany. The risk is that if one euro-zone member defaults then the domino-effect triggers contagion across other weaker members and, eventually, the biggest fish guaranteeing de facto bankrupt nations.

Just where all of this ends is anyone's guess. You have to wonder who's next in Europe. Apart from Germany and the Netherlands, most EMU countries have bulging deficits and out-of-control finances.

Some of the largest EMU members, like France and Belgium, are also saddled by high debt levels; I'm not sure the market could handle a big spike in French credit default swap rates without triggering a EUR crash in the process. France might be next.

Can Germany afford to bail-out France – the second-largest euro-zone economy? I doubt it.

It seems rather obvious to me that at some stage in the not too distant future we will witness a massive sovereign default, probably in Europe.

I reckon the Europeans are now begging the Chinese, loaded with more than $2.3 trillion dollars of FX reserves, to participate in a bridge-financing arrangement. European banks and governments need cash. If the ECB, still stuck in a stupid inflation-fighting mode, doesn't relent by printing more liquidity, then they better hope the Chinese open their wallets.

This entire bail-out business is getting out of control and has moved from the private sector to the public sector in 2010. The last stop to draw a line in the sand is the public sector. Once government exhausts its finances, it's all over. We all better get a prayer book.

Gold, which has failed to rally since the onset of the Greek financing crisis, will eventually come alive again. I don't think the market believes Greece is a deal-breaker. Yet it seems quite plausible that at some point over the next several months or years that one massive blow-out will occur throwing the global exchange rate system into utter chaos and turmoil. That event alone might drive gold prices up $100 or $200 an ounce in a single day.