- Market rallies on new and improved bailout hope
- But maybe puppy-eyes are still the best strategy

The European Politburo is now listening to the market and seems prepared to fatten out the bailout fund – the ESFS – into the war chest it needs to be. Figures of €3-4 billion are being spoken about (for reference the UK has a GDP of around £1.5 billion) but the way the politicians are looking to achieve this – using leverage – may raise some eyebrows. So, we’re going to resolve the debt problem by borrowing more … again? The latest plan is rumoured to involve allowing Greece to default, allowing it to stay in the eurozone, pumping billions into Europe’s biggest banks and, of course, the extra firepower for the ESFS. If you’re thinking that this looks like yet another bailout which provides a stop-gap not a solution, you're not alone.

Despite the regular denials from the troika, there seems to be a dark inevitability that Greece will eventually be thrown to the wolves and the International Monetary Fund (IMF) will step in for an ‘orderly’ default and manage withdrawal from the eurozone. Many people are asking what will happen to Greece when it falls out the eurozone. The simple answer is we don’t know – it’s never happened before. The only slightly more educated guess is that it’s going to leave Greece in an absolute mess. Investors will most likely face haircuts (losses) of around 50%, and the degree of social upheaval will be deeply disturbing with living standards falling off a cliff, but in the long term defaulting and leaving the eurozone will be the best thing for Greece.

There are obvious parallels with Argentina, so here’s a reminder: in May 2000, Argentina announced spending cuts, several months later more cuts and promised to cut the deficit. By December it needed a £28 billion aid package from the IMF, by June 2001 it announced debt swaps, in July the government targeted state salaries and pensions, and by November Argentineans started to withdraw money en masse from their bank accounts. In order to stem the flow, short-lived Economy Minster Ricardo Lopez Murphy announced draconian measures limiting the account of cash that could be withdrawn to £690 per month and capped offshore transfers. On 5 December, the IMF announced it would not give £900 million in aid to Argentina – pushing it to the brink – and the government reacted by going on a full-scale raid, targeting pensions by turning fixed-term deposits into treasury bonds. The jobless rate soon soared above 18%, more spending cuts were announced, the cabinet and President Fernando de la Rúa resigned in quick succession, and the country was plagued by its worst civil unrest in years with at least 25 people killed in riots and looting. On 23 December, the new interim president suspended foreign debt payments, triggering a default. Global markets were mainly calm – as the default had been long expected – and the crisis did not have a domino effect on other emerging market economies.

In terms of data, there were no major waves. The German business confidence index fell (no surprise), although not as much as expected. From the States the property malaise continues with new home sales falling 2.3% on the annualised rate. Today hardly brings an embarrassment of riches but another confidence figure from Germany – this time the GfK consumer-focused one – has come in mildly over expectations. We are expecting another negative figure from the UK CBI retail index this morning and the negativity will probably stretch into the afternoon session with the US Richmond area manufacturing figures and a CB consumer confidence report.