Cyprus Bailout, and Twilight of the Financial Crisis

Poor Cyprus is in terrible shape. After securing a bailout of its banking sector, the tiny island nation faces an economic adjustment virtually assured to lower the quality of living for most of its citizens. Much of the Cypriot economy relied on an oversized banking sector funded by overseas cash. That spigot is now shut off. Societe General analyst Michala Marcussen wrote this week that "Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017." A depression by any definition.

But outside of the direct impact on Cypriots, there was one part of last week's bailout process that I found positive. When faced with the prospect of another European country collapsing, and the serious possibility of a member leaving the euro, the response by the global financial system wasn't panic or dread, but a shoulder shrug. Headlines of "Cyprus bailout deal falls apart" and "Dow hits a new record high" could be found on the same day. This would be unthinkable two years ago.

Cyprus is tiny, mind you. Its annual GDP equals what Apple earns in profit every seven months. But Greece is also tiny, with an economy the size of Minnesota's, and its teetering from 2010 through last summer shook global markets to the core.

When Greece looked near imminent collapse, the worry was not that the country's output was imperative to the global economy, but that a collapse of its banking system and exit from the euro could spread throughout Europe. The same argument could have been made for Cyprus last week. The original bailout deal called for a portion of all deposits in Cypriot banks to be levied, sending a message to depositors across the continent that your money may be far less safe than once thought. Banking relies on confidence, and Cyprus buried confidence six feet under.

And yet! The Dow still trades near an all-time high. London's FTSE 100 trades at the highest level in five years. Germany's Dax index is near an all-time high. The MSCI World Index, one of the broadest measures of global equities, sits near the highest level five years. Gold, a proxy for panic, wiggled around last week, but trades lower today than it did at the start of the year, when many didn't even realize Cyprus was a country.

Contrast this with 2011, when a possible Greek collapse and euro exit sent the Dow down nearly 20%, global stocks down by a quarter, gold up by 40%, and churned up more than 10 million references to the phrase "double dip recession," according to Google. The market's response between then and now could hardly be more different. 

There are a couple explanations for this, some more frightening than others.

One is that we are all oblivious to what's going on in Cyprus. It takes time to sort through details, and it's entirely possible that the chaos will begin only when the dust starts to settle and we realize who is holding what, and who has nothing left to hold. Indeed, our own banking collapse and bailout commenced in September 2008, but the panic didn't take off until October and November that year.

Another possibility, which I think holds at least some truth, is that we are entering a new phase in the global financial crisis. We've calmed down and are taking more deep breaths. Dire headlines are now treated with more equanimity as investors sort through news and take a long-term view of the consequences, rather than the sell-now-think-later approach that prevailed for most of the last five years. News of a crumbling banking system and bailout is nothing new to us anymore. We have been there, done that, and read the same story over and over again. But news of higher employment, a stronger housing market, and booming energy production is new, taking many by surprise, and so it appears to be getting the most attention.

Sentiment can change on a dime, and I wouldn't dare guess what happens next. But I think our response to Cyprus is evidence that we are moving on from the torment of the last crisis. Good riddance. 


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  • Report this Comment On March 25, 2013, at 3:53 PM, Flygal5 wrote:

    I think the bigger question is what is going to happen to all the people employed in banking. Clearly if you are employed in banking in Cyprus you should be looking for a new line of work. How can you trust banks that are larger than the countries in which they reside? You can't, but that is very common in Europe.

    Europe needs productive employment and they are adding a lot of bank employees to the unemployed.

  • Report this Comment On March 25, 2013, at 5:54 PM, portefeuille wrote:

    http://wolframalpha.com/input/?i=gdp+cyprus%2Fus.

    i.e. Cyprus's GDP could go down by 10% p.a. for a decade and still show higher relative growth than that of the U.S. for the period starting 1975 ...

  • Report this Comment On March 25, 2013, at 5:56 PM, portefeuille wrote:
  • Report this Comment On March 25, 2013, at 6:01 PM, portefeuille wrote:

    I am pretty sure that Cyprus "GDP per capita" will be higher than that of at least one U.S. state in every of the next 100 years.

    Supply of Europe is in trouble nonsense articles will never cease though ;)

  • Report this Comment On March 25, 2013, at 6:41 PM, portefeuille wrote:

    ... alright, if they reported GDP the same way ;)

    Apparently Mississippi has a slightly higher reported GDP per capita than Cyprus. Less shadow GDP in Mississippi. ;)

  • Report this Comment On March 25, 2013, at 7:37 PM, xetn wrote:

    Whoa, what about the theft of the bank customer's deposits? Is everyone ok with that?

    Nothing wrong with a little theft if it protect the banks?

    This article misses the big point. There should be NO BAILOUTS! Until there are no more bailouts, there will be no safe banks. They will continue with the outsized risks that bring on the need for bailouts.

    Put another way, theft of the citizens to pay off the banker's debt. Anything to save the banks and bankers.

  • Report this Comment On March 25, 2013, at 7:39 PM, OldHorseThief wrote:

    All this and NBG jumps over 5%...I suspect Fool's gold!

  • Report this Comment On March 25, 2013, at 7:42 PM, lordprotector wrote:

    dress rehearsal

  • Report this Comment On March 25, 2013, at 7:44 PM, donaldo15 wrote:

    The Dow may be up because money is now safer in equities than it is in a savings account. Savings accounts have near zero returns AND the money is at risk of confiscation by governments....

  • Report this Comment On March 25, 2013, at 7:49 PM, whereaminow wrote:

    Porte,

    Rather than teaching us that Cyprus is a far wealthier place per capita than most (or was it all) or America, you taught us that GDP is a lousy way to measure a country's wealth.

    Congrats.

    Those of us who have traveled the world know that, in spite of America's Fascist government, it is still far wealthier than Europe. And that will not change any time soon, as Europe is currently winning the race to the currency bottom. (Despite the ignoble efforts of our technocratic anti-capitalist overlords.)

    David in Liberty

  • Report this Comment On March 25, 2013, at 7:59 PM, Kauaicat wrote:

    I think the minimal reaction to the financial crisis in Cyprus is the result of hearing the same story before with Ireland, Greece, Spain, Portugal and Italy - it's a modern twist to the old story of the "boy who cried wolf", and just like in the story, sooner or later, the whole house of cards that forms the fiat banking system will come crashing down. And the Cyprus story hasn't even played out yet...

  • Report this Comment On March 25, 2013, at 8:01 PM, dgiwiseguy wrote:

    How about the 40% haircut that Cyprus citizens are taking on bank balances over EUR 100K? One day you think your rich and the next *poof* you've lost 40% - confiscated by the government to pay for the sins of others. Fortunately the USA can print its own money, but should large bank depositors be worried? I'm over FDIC limits with some accounts.

  • Report this Comment On March 25, 2013, at 8:31 PM, wolfman225 wrote:

    Why is no one mentioning that a large number of the accounts of over 100,000 Euro belong to small and mid-size businesses who used those accounts to hold the funds that covered their overhead (payroll, taxes, etc.)? How many of those businesses are going to fail, now that they don't have the resources to meet payroll, pay their taxes or buy raw material/supplies? No one really expects the government to forgive them a portion of their tax just because better than a 3rd of their money has been confiscated, do they?

    Those businesses that don't immediately fail, I expect to look to close up shop and relocate to a more business friendly, sane environment. Anyone who thinks this was a "one time" levy is fooling themselves.

    Oh, and one other little wrinkle. Many Russian billionaires had/have accounts in Cypriot banks. I don't believe they are the type to accept the confiscation of millions of Euro philosophically, do you? Being a bank executive in Cyprus may not be the healthiest occupation for the next little while.

  • Report this Comment On March 25, 2013, at 8:48 PM, Tomohawk52 wrote:

    Government wants people to be weak. It allows them to push you around. People with money can push back. If they take saver's money then those people will have to rely on the government. Savers can tell the government to eff off. Can someone who has no money and huge debts (CCs, HELOCs, etc.) do that?

  • Report this Comment On March 25, 2013, at 8:57 PM, steveg541 wrote:

    yes,,we have entered a new phase..we have all calmed down and the Fed is injecting $85B a month into the economy. hahahahahaha

  • Report this Comment On March 25, 2013, at 9:46 PM, TomBooker wrote:

    With the exception of Iceland (and they are still pending getting screwed) is there somebody left in the West still under the delusion that "fair" and "just" has anything whatsoever to do with Financial Systems and their Sovereigns enmeshments.

    Money is being taken from saver accounts at the point of a gun. Who those people are, and if they beat their wives, is immaterial and misdirection.

    Whether it is the US or Cypress, the only thing which is clear is if you played the game honestly. You pay for the Financial System's mistakes. The Gov't forces you and really doesn't ask.

    At least in Cypress, they just loot the money directly from the accounts.

    Here in the US, they give $trillions to the banks, guarantee untold $trillions more, and add $trillions to the debt because of the Economy which was destroyed.

    Somehow, corporate profits and the S&P500 make up for this.

    OK. Fine. If this somehow makes sense and is fair and just. But...

    We're 5 years past the last cyclical Crapout. In 2-3 years we'll be due for another Recession. Not the biblical type, I don't have to go there. Just your garden variety bubble-burst.

    What do the geniuses have planned for that?

    The only ones who will have anything which can be looted is them.

    Enjoy the sentiment while ya can.

    Recessions come, they always do.

    It'll be a little bit more difficult to pick who we throw from the boat next time.

  • Report this Comment On March 25, 2013, at 9:56 PM, optimist911 wrote:

    Entering a new phase of complacency is no cause for celebration. This article reminds me of the Iraqi war minister who kept insisting that Iraq is winning even as Allied bombs and rockets were exploding all around him. You can try to fool yourself and tell yourself that everything is hunky-dory, but we all know that such things never end well.

  • Report this Comment On March 26, 2013, at 12:34 AM, SailorChucky wrote:

    People riot when the confiscation is direct, but rarely complain or understand that the same thing occurs when the Government prints large amounts of money, causing inflation, which degrades the value of their money as much as a direct seizure. And no riots!

  • Report this Comment On March 26, 2013, at 2:50 AM, gladlylearn wrote:

    If a bank fails, it goes bankrupt. In the worst case, the money is GONE. The depositors get Zero back, because there is zero money to give back. That is what bank failure means. If they are lucky, the money is not all gone, and they may get some of it back.

    Bail outs lend banks money so they do not fail. In this case, the deal shares the pain a little, in case the lenders do not get their loan repaid.

  • Report this Comment On March 26, 2013, at 3:18 AM, SPARTANBURG wrote:

    It's plain scary. Just imagine waking up one morning and having most of your life savings taken away without you even having a clue to why it happened. True, the Cypriot government knew what was going on and so did Europe(although Cyprus quality banks and system can be found in other countries throughout the world). But does average Joe have to apply an excel sheet on a country's output, GDP and geopolitical outlay. Is our age one of mastering financial details on every level of the population regardless of education, profession(you just may be an actor or a farmer)? It seems we are going to have an awful lot of nervous citizens throughout our beautiful earth. "fool on".

  • Report this Comment On March 26, 2013, at 5:03 AM, 1Dukepa wrote:

    The entire European and Asian markets were all positive after the bailout agreement of Cyprus so explain to me WHY US markets all explain the Cyprus resolution as a reason for US markets taking a tumble.

    Market makers ?

    Institutions needing the elevated markets to be lower because they missed the initial climb?

    Please Es'PLAINE it to me LUCY!

  • Report this Comment On March 26, 2013, at 5:21 AM, aegeansail wrote:

    The significant Cyprus "real economy/investment-outcome" due to the (idiotic) EU decision making is: Go Short in European Banking (deposits will fly out), Go Short in European Industries (they depend on their bank's liquidity) and go Long US Banking (cash flows from EU deposits).

  • Report this Comment On March 26, 2013, at 11:01 AM, whereaminow wrote:

    This is great. Hat tip to EPJ:

    Feb 25 2011 - The Banker magazine ranked the Bank of Cyprus amongst the leading banks of the world.

    Apr 4 2011 - The prestigious Global Finance financial magazine honours the Bank of Cyprus with the title of Best Bank in Cyprus.

    Jun 15 2011 - The Bank of Cyprus has succeeded in being included in the category of «Best Banking Organizations» worldwide at the annual World Finance Banking Awards of the internationally acclaimed financial magazine World Finance.

    Sept 13 2011 - In the framework of its annual “Awards for Excellence 2011”, the Bank of Cyprus was named Best Bank in Cyprus by the international financial magazine EUROMONEY.

    Nov 1 2011 - The Bank of Cyprus was awarded the ‘JP Morgan Chase Quality Recognition Award’ for its funds transfer operations for the eleventh consecutive year.

    Dec 1 2011 - The Bank of Cyprus was named “Bank of the year 2011” in Cyprus by the prestigious international financial affairs publication The Banker, during its annual “Bank of the Year Awards 2011.”

    Feb 9 2012 - Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY.

    Mar 23 2012 - The international financial magazine ‘Global Finance’ has named the Bank of Cyprus the best banking institution in Cyprus in the Developed Markets category of “World’s Best Banks Awards”.

    Sep 26 2012 - Bank of Cyprus has been awarded the ‘2011 Citi Performance Excellence Award’ by the world-renowned financial organization Citibank, for global electronic payments leadership and excellence.

  • Report this Comment On March 26, 2013, at 11:03 AM, Gorm wrote:

    Ruined is the expectation, that conditioning that banks, even the TBTF, will always be saved. In the US, FDIC coverage was expanded years ago to "unlimited" just to stabilize bank liquidity. Unlimited was reduced to $250k YE 2012 via Dudd Frank.

    The bigger issue NOW is CFOs, Treasurer's and risk managers FORCED to choose depositories based on the their financial soundness. That equates to bank runs as money moves to the safest havens, creating liquidity problems for the already ailing banks. What will the troika do?

    From my perspective ALL our problems, ie lack of mark to market grading and toxic assets awareness, unregulated derivatives, interconnected banking dependency exposures have ALL been exacerbated by this action.

    CYA!!

    Gorm

  • Report this Comment On March 27, 2013, at 6:25 AM, doughkneader100 wrote:

    The difference between Greece and Cyprus is that in Greece you found more capital from many different western countries linked and tangled up with the economy there, but in Cyprus the big depositors are mainly Russians. The western markets just don't care that much about a couple of billionaries from mainly one single country. Also I would like to point out that the difference between Greece and Cyprus, or any other European country for that fact, is much much greater than a difference between a Minnesota or let's say a Rhode Island. Not only finacially but also because The United States of Europe is just a vision that won't come true for a long time or maybe never, because the multi-millenium old history of every single region is under everyones skin there. Every process of agreeing on anything is just a little bit harder to go through than many Americans can imagine, and Europe will always stay a problem for global markets. Too unpredictable. The Dow rightly shrugged off "The Cyprus Intermezzo", because from the Dow's point of view it's only realy hitting Russian oligaches and only causing collateral damage to the native Cypriots.....

  • Report this Comment On March 27, 2013, at 7:17 AM, rhweimer wrote:

    Zerohedge had had a series of good articles on the Cyprus situation. One noted that the Bank of Cyprus branch in London was NOT closed during the bank holiday in Cyprus. It is speculated that a lot of Russian and British money has leaked away through that portal. Not surprising as ~20% of the big money in Cyprus was Brit!

  • Report this Comment On April 01, 2013, at 1:27 AM, ChrisBern wrote:

    optimist911 said it best. It's called COMPLACENCY, and pretty much every major market drop is preceded by COMPLACENCY.

  • Report this Comment On April 02, 2013, at 1:32 AM, VictorErimita wrote:

    If oblivious calm were all that was needed to avert financial meltdown, then I guess our government could infinitely borrow money it doesn't have, or simply print it and inject it into the economy by the gazillions, and we could ignore it and sail off to happy land. Right? Because that is exactly what is happening. How is that remotely seen as a sober assessment of the global financial situation?

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