Making Debt Recovery More Efficient in Portugal: A Cornerstone of Economic Recovery
Challenge
The investment climate in Portugal had been hampered by a slow and inefficient legal enforcement system that made it difficult to recover debt. This contributed to slower growth and reduced employment, as businesses were reluctant to invest and had difficulties accessing credit. During the global financial crisis, unpaid debts increased significantly and the legal enforcement system could no longer cope. The system effectively ground to a halt and the market seized up: banks or businesses could not recover debt or use legal measures to restructure them at the pace needed to foster a strong recovery.
Approach
Portugal had just entered into an adjustment program with the IMF, and the authorities recognized that tackling the legal challenges that had hobbled the country for a long time would have broader positive economic effects. They began working with the IMF to design and implement long-awaited structural changes in order to significantly improve the efficiency and effectiveness of debt enforcement.
The authorities, the IMF staff team and other key stakeholders broke down the complex issue into more attainable components. Performance targets, judicial specialization and a new judicial organization streamlined the court process. Enhancing oversight and adjusting the fee structure for enforcement agents had a positive effect on the enforcement process. A new system to easily search bank accounts sped up direct recovery. Finally, the old cobwebs were cleaned out with special task forces tackling the vast backlog of dormant cases in the system.
Impact
These measures resulted in tangible changes. Debt enforcement became faster, cheaper and with higher recovery. Each year since the reforms took hold, courts have processed and cleared more cases than have come in, and duration to complete each case has dropped. When the system of bank account seizures took effect, even in the first 15 months recovery was 130 times higher than the preceding decade. The large number of dormant cases was cleared from the system. All of this resulted in a reduction in banks’ transaction costs.
Efficiency gains and predictability of debt recovery send a signal of stability to banks and businesses alike, and allow for more money, time and willingness to extend credit and invest. Changing bureaucratic systems and cultures is not a simple thing to do, and requires a sustained effort over time. Strengthening the nuts and bolts of the legal environment has been key for Portugal to tackle some of the issues vital to the country’s growth prospects. Continued monitoring of ever-evolving challenges, and ensuring that banks can lend money and businesses can plan for the future, is crucial for sustained recovery and increasing employment.