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LJUBLJANA – Bank stress tests indicate that Slovenian lenders do not need a bailout, but private consultancies played a controversial role in the evaluation.

The test results, published last month and accompanied by positive statements from the Slovenian government, the Bank of Slovenia and the European Commission, say Slovenia can recapitalise its banking sector without international help.

But the role of financial consultancies, Oliver Wyman and Roland Berger, and auditors, Deloitte and Ernst & Young, in the exercise has prompted questions on lack of transparency and conflict of interest.

The EU commission and the European Central Bank (ECB) blessed the arrangements.

According to a press statement by the Slovenian central bank, the “scope, conditions and performers of asset quality review and stress-tests were determined by [an] intersector commission after consultation with [the] European Commission and European Central Bank.”

The stress test report on the central bank’s website notes that the tests were “closely monitored by the international organisations, constituted of the European Commission, the European Central Bank, and the European Banking Authority. These institutions ensured international standards were met and supported the design of the macroeconomic scenarios.”

The bank also says that due to lack of time, the ongoing credit crunch and prolonged negotiations with the EU institutions, it was forced to hire the “suggested” consultancies without a public tender and using a legal procedure normally reserved for arms procurement contracts.

The procedure means that, aside from the results of the tests, all other information, such as the methodology used and the fees paid to the consultancies, have the formal status of military secrets.

Last summer, several Slovenian economists signed a petition demanding that the “credible methodology” – to use the EU commission’s phrase – be made public.

It never was.

Instead, the terms of reference and the whole process underlying the test results was negotiated between the Slovenian central bank and EU officials behind closed doors.

To carry out the tests, some 250 consultants spent four months in Slovenia reviewing eight of its banks.

The personnel, mainly from London, had little knowledge of Slovenian institutions or the Slovenian language.

The exercise was carried out with extensive help from the Slovenian central bank itself, which effectively repeated its own earlier evaluation.

The central bank estimated in October that the cost of the new test will be over €21 million. The initial estimate does not include the consultancies’ possible overtime and additional expenses, which are to be filed later.

By comparison, Spain, whose economy is 40 times larger than Slovenia’s and whose banking sector is 80 times bigger, paid consultancy firms €31 million to do a similar job in 2012.

Pushing down the price

The consultancies had a crucial role in determining how much Slovenian taxpayers will have to pay to put the country’s lenders back onto a stable footing.

Various Slovenian institutions had previously assessed the recapitalisation needs of three Slovenian state banks to be no more than €1.5 billion.

But the new stress tests cited €3 billion.

The figure is higher because the consultancies evaluated some real estate and other assets at their potential liquidation price.

The Slovenian central bank said the new test was “conservative” in its approach.

This is good news for potential investors, but bad news for Slovenia’s taxpayers, who now have to pay twice as much as before to fix the problem.

It could also spell bad news for other EU countries’ tax payers – the Slovenian stress test is likely to act as a template for the ECB’s upcoming review of the eurozone’s 130 top lenders.

The ECB review is also using Oliver Wyman.

For his part, the former Slovenian central bank governor, Mitja Gaspari, has estimated that if the same criteria are used at European level next year, the eurozone recapitalisation price will not be €100 billion, as expected, but approximately six times higher.

Potential conflicts of interest

Meanwhile, the Slovenian consultancy contracts and the private firms’ corporate structure pose questions on potential conflict of interest.

Back in 2012, the consultancy European Resolution Capital Partners (ERC) was hired by the Slovenian finance ministry – again, on the “recommendation” of the EU commission – to help Slovenia set up a bad bank and to perform an asset quality review of the three state banks.

The firm pronounced its verdict on the bank’s assets based on full access to commercially privileged information.

But now, Ovington Capital, an ERC offshoot, is creating an investment fund which will trade the bad bank’s debt.

In other words, ERC first set the price and now it is buying the assets.

Oliver Wyman, the New-York-based firm hired this year for the new test, flagged up its potential conflict of interest in its contract with the Slovenian central bank.

“It is the company’s practice to serve multiple clients within industries, including those with potentially opposing interests. Accordingly, the company may have served, may currently be serving or may in the future serve other clients whose interests may be adverse to those of the client,” the document says.

The company bound itself to “maintaining the confidentiality of each client,” but there is no way for the Slovenian authorities to make sure it does.

Oliver Wyman is part of the Marsh & McLennan group.

According to a 2011 study by the American Institute for Political Studies, the group has 105 companies in 20 different tax-haven countries and paid zero profit tax in the US in 2010.

Other international firms, which co-operated with Oliver Wyman in Slovenia – real estate firms Cushman & Wakefield, Jones Lang LaSalle, Colliers International and CBRE – also have “potentially opposing interests.”

Cushman & Wakefield, for instance, is owned by one of the biggest Italian investment funds, Exor.

Wrong medicine?

The panic about Slovenia becoming the next Cyprus has turned out to be unfounded.

This is shown not just by the new stress test, but also by other reports.

Earlier in December, the Brussels-based think tank Lisbon Council and the oldest German bank, Berenberg, said, in their Euro Plus Monitor report, that Slovenia is the most resilient country in the eurozone when it comes to financial shocks.

“Topping the ranking is Slovenia, a country which had been tipped as the next bailout candidate after Cyprus and still faces one of the highest borrowing costs in the eurozone,” the study says.

It adds: “Slovenia’s public and private debt levels are low, as befits a country with still modest per-capita GDP. Slovenia also runs a sizeable current account surplus and the banking system is small compared to the economy. Its problems seem more than manageable, whether it will need eurozone support or not.”

By many other standards, Slovenia is not really the healthiest euro-country.

International analysts and the EU commission usually say that state-owned companies and state ownership more broadly caused the country’s economic problems.

But the real reason is the government’s wrong-headed economic policies.

In the economic boom years of 2004 to 2007, when Slovenia joined the eurozone, the country was flooded by cheap euro money.

The government was not prepared for it.

It did not respond with countermeasures, such as saving schemes, to cool the economy.

Instead, new money was borrowed, taxes were cut, big projects were started and banks rolled out credit to investors.

Private sector and state debt rose from €15 billion to €33 billion in just four years. Ironically, state banks were, in that period, the most cautious. Their loan-to-credit ratio was at that time 1:1.3, while foreign banks in Slovenia, like Hypo, Raifeissen or Unicredit had a ratio of between 1:2 and 1:2.5.

Despite this, the EU commission in its macro-economic recommendations this year insisted that Slovenia privatises its banking sector.

The Slovenian government has also promised to sell 15 other state-owned companies, ranging from telecoms to energy and the Ljubljana airport.

The money will be used to lower the country’s state debt, which has now risen from 50 percent of GDP to some 75 percent of GDP.

Its debt climbed, in large part, due to the Oliver Wyman-dictated €3 billion bank recapitalisation.

The Slovenian state has no other option but to sell off assets.

But if the timeframe is short and the assets seized from banks are sold at liquidation price, the bill for Slovenian taxpayers will be even higher than it had to be.

At the same time, investors – such as firms in the Marsh & McLennan group “whose interests may be adverse to those of the client [Slovenia]” – will get an opportunity to snap up Slovenia’s crown jewels at bargain rates.

Borut Mekina is a journalist writing for the Slovenian weekly Mladina