Montreal, Canada

First it was Dubai, then Greece, and now it looks like Spain and Portugal are next on the firing line.

Imagine what happens to global capital markets if and when investors decide to dump Treasury bonds, driving interest rates through the roof and triggering the Mother of all sovereign debt crises?

Can it happen to the United States – still home to the deepest and most liquid markets in the world? After all, the U.S. is still the only reserve currency in the world and can always honor its debt obligations through endless printing, if necessary.

What about Germany? If the now defunct deutschemark was still legal tender I'm pretty sure it would be trading at a premium to the French franc, Italian lira and, certainly, the Greek drachma. Yet, it would also be sharply lower vis-à-vis the dollar right now because German trade is highly tied to the rest of Europe and bond contagion would be unavoidable.

As the weakest bond credits start to fall like dominos, the credit crisis is now taking on a new theme as it spreads from the private sector to the public sector. Now governments are under attack in the major markets and are increasingly being forced to cut spending, or else.

So if countries like Greece, Spain, Portugal and whoever else are bailed-out by the EU (European Union) led by Germany and the International Monetary Fund (IMF), what does that exercise say about the long-term viability of German bonds? If the most sober attendee at the bar is assuming all of this debt then what happens to its own finances and, ultimately, credit rating?

This entire fiasco will end very badly for capital markets at some point in the future. For now, everyone is running to the United States and Germany to park their cash in bonds. But isn't that the equivalent of running to Stalingrad in 1942 just ahead of the German invasion?

This game of ping pong will continue until the last man is standing. I think that "last man" won't be a sovereign credit but instead, gold.