The dog did not bark in the night, indeed it barely whimpered. The turmoil in Cyprus pushed down the euro a bit, though it clambered up on Friday, but markets as a whole reacted with equanimity.
UK shares were off but maybe that was more to do with the gloom in Britain. By the way, the adverse news in the Budget coincided with a rise in gilts. The yield on 10-year gilts is back to 1.85 per cent, compared with a peak of nearly 2.2 per cent after the downgrade. So much for the power of the rating agencies.
Anyway, the markets have broadly ignored Cyprus. There are two ways of looking at this. One is to note that when Archduke Ferdinand of Austria was assassinated in 1914, shares in London, Frankfurt and New York barely moved on the first day of trading – though they did fall sharply over the next couple of weeks as German financiers, who had been briefed that war was coming, sold their international holdings. No one should push that parallel too far but this could be bigger than it seems right now.
The other response is to note how small the Cyprus economy is. The point is often made that it is only 0.2 per cent of the eurozone. As Jim O'Neill of Goldman Sachs has noted, in the week that the banks there have been closed, Chinese growth has created another Cyprus. So in a sense the markets are acting rationally to discount it. Even if you look at the bank deposits in Cyprus, which are proportionately larger than the economy, it is hard to see this being another Lehman Brothers, where one brick being pulled out of the wall collapses the edifice. Besides, we now know much more about the interconnections in global banking and ought, to manage another banking crisis more competently.
The big drivers of the developed world economy remain its central banks. The consequences of what is happening in Cyprus may delay the inevitable tightening of policy by the ECB. The Fed is likely to keep printing a little longer, as will the Bank of Japan, as will we in the UK. They will stop sometime, but not yet.