If violinists can’t tell the difference, how can S&P?

If violinists can’t tell the difference, how can S&P?

We live in interesting times. Are you following the after-effects of Standard & Poor’s (S&P) downgrade of European countries like France, Italy, Austria and Spain? I do not mean the reaction of the financial market. That was obvious. Risk aversion is always good for dollar assets. No, I mean the reaction of the governments themselves. That was fun to follow. If you ask me, what those countries are entering can most nearly be described as the five stages of grief. They are now in the first stage of denial. Just take a look at the reaction of Victor Ginsburgh, from the Universite Libre de Bruxelles. His commentary was titled, “Why expect S&P to know it’s junk when expert musician’s can’t tell a Stradivarius from a fiddle?” Have you read it at (www.voxeu.org). Please do.

Italy’s preemptive reaction day before the downgrade was superb. Guardia Finanza, the tax audit police, was sent after two S&P analysts. They raided the S&P Office in Milan and took files as possible proof of illegal activity. The police were after an attempt to manipulate markets by falsifying the analysis and/or using false data to give the impression that Italy was in shambles; so Turkish a reaction. That’s Mediterranean camaraderie, I presume. A word of advice for our Italian friends: you should also raid the offices of the World Bank. Their index on good governance also makes them a culprit in this game. The perceptions index shows Italy to be by far the worst country in terms of the governance indicators. Very subjective. Very dangerous. Some World Bank experts might also like to manipulate the Italian markets. Italians, by the way, cannot be blamed for Italy’s shambles of course.

A similar Turkish story from a decade ago

It sounds like a joke but I am deadly serious. We in Turkey had similar discussions on this issue about a decade ago. Ministers were saying “the downgrade reflects the subjective views of S&P, not the objective situation on the ground.” Of course it is the subjective views of S&P analysts. That is what they are paid for: To express their subjective views on the inherent risks. Now, that brings me to the issue of violinists and the Stradivari.

Violinists and the Stradivari

That line is a reference to an experiment conducted by Carl Fritz of Pierre Marie Curie University in Paris and violin maker, Joseph Curtin. It is a double-blinds study performed in 2010 and the results were published in the proceedings of the National Academy of Sciences in 2012. The paper is entitled:

“Player preferences among new and old violins” (http://www.pnas.org/content/early/2012/01/02/1114999109). There are six violins involved in the study, one Guarneri del Gesu (circa 1740), two Stradivari (circa 1700 and 1715) and three modern makes. The test took about an hour. Violinists test the violins in pairs at a hotel room and are asked which one they prefer. The result: the most preferred violin was modern; the least preferred a Stradivarius. It appeared that the tools of their art were so obscure that even violinists themselves could not judge old from new.

But then violinists started answering. Laurie Niles, one of the artists, has written in her blog (http://www.violinist.com/blog/laurie/20121/13039/) that she was not asked modern from old, but simply which one she liked playing. Nor, she said, was it their “task to pick the Italian” but “to pick our preference.” That is exactly what the S&P is doing. They pick their – sorry, but very subjective – preference.

Let me tell you what I don’t like. I don’t like reports about the Commission working on a plan B for the possible breakup of the eurozone. That paves the way for unintended consequences. Now that is bad.