Portugal's judicial makeover - the reform that flattered to deceive?

  • World
  • Tuesday, 22 Nov 2016

A view of one of the archive storage rooms in Sintra courthouse in Sintra, Portugal November 14, 2016. REUTERS/Pedro Nunes

LISBON (Reuters) - When international creditors released Portugal from onerous loan conditions two years ago, they hailed the nation for some major reform achievements - not least, an overhaul of the judiciary.

The International Monetary Fund applauded Lisbon for reforming a dysfunctional court system which had been a brake on the economy. And with the European Union, it approved Portugal's exit from a 78 billion euro (67 billion pounds) bailout programme which had begun in 2011.

But judges and entrepreneurs say the system was never really fixed and a deeper analysis of case-load data shows it has improved less than the official statistics suggest. It remains a bottleneck in an economy still staggering under bad debts.

Almost 900,000 disputes over bad loans, unpaid bills and mortgages are pending in the courts, restricting new bank lending to companies and families and weighing on investment.

These so-called "enforcement of payments" cases, which experts say are likely to be worth tens of billions of euros, are down by a quarter from their 2012 peak.

However, judges attribute this reduction in large part to a 2013 decree that swept the oldest, most hopeless cases from the system. Cases where creditors have a better chance of recovering a borrower's assets still inch their way through the courts.

The decree eliminated three quarters of all cases processed in 2013, justice ministry data shows. No data exists for later years, but one judge says the space this created to work on more promising claims was largely filled by new, hopeless cases.

As they cleared futile claims, where creditors have almost no chance of recovering debts, more such cases arrived, largely from banks that would rather park them in the judiciary than take hard decisions to write them off, experts and judges say.

"Most of the cases end with zero debt recovery ... In that aspect the reform was inefficient and dysfunctional," said Joao Raposo, a judge in the district court of Sintra, near Lisbon, who is also deputy head of the Portuguese Judges Association.

"The statistics look good, but it's a bit of an illusion that the bailout lenders were happy to accept," said Raposo.

The IMF, which had lauded Portugal for "one of the most successful reforms" ever undertaken in the judiciary, denied it had exaggerated those achievements in order to show to anti-austerity campaigners that the bail-out programme was a success.

In an email to Reuters, it cited a drop in pending enforcement cases, faster processing times and a boost in loan recoveries from a new electronic system for seizing cash from overdue debtors' bank accounts. This new system, though, has not made a major dent in total debts stuck in courts, judges say.

Portugal's backlog of pending non-criminal cases - mostly debt-related - remains by far the largest in the European Union when adjusted for population, EU data shows.

Though it fell to some 11,000 cases per 100,000 people in 2015 from a 2012 peak of over 14,400, the backlog is still almost double that of runner-up Italy with 7,500. Neighbouring Spain has fewer than 2,000 cases per 100,000 people.


Portugal's main business lobby says courts still offer little hope for creditors seeking to recover debts.

"The judicial reform for the economy has failed," said Antonio Saraiva, head of the Portuguese Business Confederation, calling the courts slow, costly and unpredictable.

"Court delays cause unbearable constraints on companies cash flow, generate a sense of impunity and make up one of the main obstacles to investment in the country."

Virgilio Valadas, director of building firm Construcoes Monsaraz, is suing several of his customers for unpaid bills totalling 2 million euros ($2.1 million), equal to nearly half its annual turnover. One case has been pending for six years.

He said courts appeared faster to set hearing dates, "but in terms of recovering debts, we've got nothing so far".

"Where it hurts the most is when it comes to investment decisions," said Valadas, 43, whose firm employs 70 people and builds housing and hotels in the Alentejo region and in Lisbon.

He said he planned to use any funds recovered through the courts to take advantage of a pick-up in property prices and revive several frozen real-estate projects.

Unlike many construction firms, Valadas's Construcoes Monsaraz survived the recession and financial crisis that had triggered the EU-IMF bailout in 2011 and gave rise to many of the bad debts that he is still seeking to recover.

"The reform's nature was cosmetic to show to the troika (of EU-IMF lenders) that Portugal was taking action," said Professor Joao Paulo Dias, a judicial expert at Coimbra University.


The IMF, judges and experts agree on one thing, however: that banks need to take a much more aggressive approach to the problem of bad debts rather than use the courts as a way of parking them and avoiding the need to write them off.

"It will take years to change the mindset of creditors, banks mainly, who prefer to flood the justice system with often hopeless claims rather than acknowledge bad loans and write them down or off," said Raposo, of the judges association.

Portuguese banks must provision for bad loans but do not need to write them off if they are pursuing repayment in courts.

Non-performing loans are still rising two years after the nation exited its bailout programme: they totalled 17.8 billion euros in September, double their 2010 levels, Bank of Portugal data show. Bad loans represent a fifth of all loans outstanding, more than three times the EU average, the European Banking Authority data show.

This is restricting bank lending. Even as euro zone lending grows, Portugal's banks wrote about 3 percent fewer loans in September than a year ago.

Portugal's banking association denies banks contribute to the problem and says it is working with the government on plans to remove legal and judicial bottlenecks. Instead, it blames slow justice for bad loans remaining on their balance sheets for four to six years, the EU average of two years.

Raposo's court in Sintra near Lisbon has 60,000 cases pending, worth an estimated 2 billion euros in enforcement claims. It has been at this level for a few years, says Raposo who alone has a personal case-load of 20,000 enforcement cases.

The 2013 decree eased his court's backlog, but he said it remained overwhelmed. Despite being assigned back-up judges, he added, his court needed double its three permanent judges.

There is no data on the overall value of the roughly 900,000 enforcement cases still choking up Portuguese courts. But if Raposo's district court were a representative sample, they could amount to more than 30 billion euros, or 17 percent of GDP.

The government has said it is working on a solution to rid banks of bad loans, but details are still scarce.

The court system has been streamlined under bailout reforms: more than 200 district courts have been closed, with their cases transferred to larger courts, and enforcement cases are now handled by one judge rather than a panel of three previously.

The courts have installed a single computer network and appeal fees have been raised to discourage excessive litigation.

However, these efficiencies were accompanied by a cut in the judicial budget, which is down 14 percent since 2011. Judges complain of a lack of qualified assistants and equipment.

"The reform was done hurriedly and cheaply, which means more costs in the longer run," said Coimbra University's Dias.

The Justice Ministry counters that the case-clearance rate has risen for 15 straight quarters, saying the removal of hopeless cases had helped to unclog the system.

"One cannot affirm that there are no effects in terms of debt recovery," the ministry said in a written reply to Reuters.



The business confederation's Saraiva said a recent survey showed companies rated slowness of courts as their main concern weighing on investment.

The Justice Ministry said judicial spending would rise 6.5 percent next year. At 1.8 percent of total state spending, the judicial budget is similar to France and Norway, it added.

    However, Joao Costa, director of metal-parts manufacturer Arpial, is not convinced. He has been trying without success to collect unpaid bills through the courts for four years.

    "Justice works terribly, never has worked and I doubt it ever will. Nothing has improved for us since the reform," Costa said. "Who's going to invest here if there's no way you can recover a client's debt?" 

    ($1 = 0.9347 euros)

(Editing by Mark Bendeich, Janet McBride)

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