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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.