Europe's leaders -- that is to say German Chancellor Angela Merkel and the bureaucrats running the various eurozone agencies from Brussels -- have looked into the abyss and don't like what they see. Specifically, a default and departure by even a relatively insignificant country like Greece might start a contagion that cripples or destroys the whole eurozone.

So despite the posturing now going on about a Greek exit being manageable and that there should be no give in core country demands for peripheral austerity, that's just for show. The bureaucracy will do just about anything to avoid finding out what's on the other side of a Greek departure. Today the hints of a softening began:

Greece Gets Hint of Leeway From Euro Officials
European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country's feuding politicians put together a ruling coalition committed to austerity.

Calling talk of a Greek pullout from the euro "nonsense" and "propaganda," Luxembourg Prime Minister Jean-Claude Juncker said only a "fully functioning" Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.

"The government would have to stand by the program," Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. "If there are dramatic changes in circumstances, we wouldn't close ourselves off to a debate over extending the deadlines."

Some thoughts

When eurozone bureaucrats describe a Greek departure as "nonsense" and "propaganda" that's of course what they have to say to avoid giving up the game immediately. They know a Greek exit is possible and maybe inevitable, but to keep it from becoming a self-fulfilling prophecy they have to pretend that things are under control. Always assume heated denials from government officials are lies because most of the time they are.

Before this is resolved, the eurozone will make some truly breathtaking offers of leniency to Greece, but by then it will be clear that if Greece accepts, the cost of extending the same deal to Spain and Portugal will be ruinous -- or highly inflationary.

Looked at another way, if Greece does leave the eurozone, then the headlines will stay the same, but with Spain and Portugal in place of Greece. The crisis can't end until all the PIIGS countries are made solvent, which is to say until the ECB buys up all their debt.

The probable result: by year-end the currency war will be in full swing, with the ECB, the Fed, and the Bank of Japan operating in helicopter mode. The precious metals markets haven't begun to anticipate this yet, but they will, once the Greek negotiations get down to specifics.