Montreal, Canada

The odds continue to grow that some sort of bungled central bank policy or combination of policies among the industrialized central banks will trigger the next financial crisis – probably in the debt markets or/and foreign exchange. Greece, Dubai and Iceland are just the tip of the iceberg.

China, where the world remains glued for clues of credit tightening, might also unleash the next blitz on world markets because of her dangerous attempt since last week to begin draining excess bank reserves amid a full-blown asset mania since 2009. The world has staked too much on China and her ability to navigate her bulging asset bubble; the odds suggest some sort of policy error in her quest to cool the economy.

Meanwhile, sovereign state borrowing will increase again in 2010. The United States and Europe alone with require at least $5 trillion dollars of funding this year; if governments can't secure the necessary capital then quantitative easing will come back into play as central banks mop-up excess paper the markets can't absorb. And the more paper central banks absorb the higher the risks we will suffer a massive credit overshoot in this recovery cycle.

In 2009, the United States issued almost $2 trillion dollars of debt financing courtesy of Treasury. The Fed purchased 17% of all Treasury issuance last year (aka "quantitative easing"), according to Montreal-based Bank Credit Analyst. In 2010, U.S. borrowing is likely to exceed $2 trillion dollars.

In Europe, a full-blown credit squeeze is already attacking Greek financing costs as the threat of some sort of default continues to rise. Though reluctant to commit to a Greek bailout, it's almost a guarantee the European Union (EU) led by Germany will orchestrate immediate funding if Greece fails to secure external financing. So far, Greece is still raising money without external assistance.

In 2010, Europe is projected to raise €2.2 trillion or $3.1 trillion dollars to fund ongoing financing requirements by the United Kingdom and the continent. According to Fitch Ratings, the projected borrowing represents an increase of 3.7% from the €2.1 trillion raised in 2009. As a percentage of gross domestic product or GDP, borrowing is expected to be the largest in Italy, Belgium, France and Ireland.

The question is how much sovereign debt will global markets absorb in 2010 without unleashing some sort of debt financing crisis in the event all of this paper can't be funded? Worse, if the global economy suffers a double-dip recession in 2011 or 2012 then the ingredients for a full-scale debt crisis at the sovereign level is almost a guarantee because governments by then will have already exhausted the markets' goodwill.

Central banks will rescue any leftover scraps of failed auctions but it seems plausible that this endgame will result in a significant credit overshoot and result in the worst inflation since the 1970s.

Also, the rating agencies, though conduits for central banks, might be compelled to downgrade some sovereign debt, which would force pension funds to unload what was previously deemed to be super-safe paper. Greece, Spain, Ireland, Portugal and the United Kingdom come to mind as likely downgrade targets. The United States also deserves a credit downgrade but would probably terminate the credit agencies overnight through a covert CIA operation. In my book, the entire financial system is rigged.

The risks are increasing that the Fed and perhaps other central banks will get it wrong this year. The worst possible mistake is to hike lending rates. If the Fed starts tightening credit then we can kiss commercial real estate financing goodbye because this artery of financing remains highly impaired going into 2010.

But then again the Fed has never "got it right" since its sad birth in 1913 and probably won't do the right thing in 2010. There is a monster price tag yet to be paid for all of this borrowing to bailout the banks and other industries since 2008. It's naïve to assume we've seen the worst because too much government paper will eventually flood demand and cause a serious spike in interest rates at exactly the wrong time.