Stockholm (Ekonamik) – Zombies are back in the news – at least according to recent estimates from Bank of America Merryl Linch that 13% of companies in the world are not profitable enough to cover the interest payments on their debt.
The estimate, reported by CNN, identified 536 troubled companies, only 90 less than at the peak of the great recession. The figures suggest that the last decade of record low-interest rates and accommodating monetary policy has created a fertile ground for companies that would otherwise have gone out of business to survive.
Zombie firms are a recurring problem, somewhat characteristic of the business cycle, too big to fail and to a certain extent of the power of interest groups. The term was originally coined by Caballero, Hoshi and Kashyap in 2008 to describe the widespread practice of Japanese banks of continuing to lend to otherwise insolvent firms in the early 1990s. The terminology was generously applied in the last US recession to describe companies that had to be bailed out by the US government. Prominent Zombie US firms included GM and Chrysler. In the Eurozone, Italy is a prolific producer of Zombie banks. China’s model of state-led capitalism also offers a fertile ground for zombie firms, particularly among the state-owned enterprise sector. Ekonamik has not seen the BofAML’s original report but we suspect that some criterion is used to truncate the data. This must be the case, as estimates for zombie firms in China alone have been reported to be anywhere between 2,000 or 20,000, according to the Chinese State-owned Assets Supervision and Administration Commission (SASAC) and Euler Hermes.
It is not impossible for zombies to come back to life. As ProPublica shows, overall the companies bailed out by the US government during the recession have generated an aggregate net profit of US$ 107 billion to the US government. Most of these 980 companies could have been qualified as zombies at one point or another.
However, this revival has an opportunity cost. “Previous studies have shown that zombies tend to be less productive(…). Therefore, the higher share of zombie companies could be weighing on aggregate productivity. Moreover, the survival of zombie firms may crowd out investment in and employment at healthy firms,” argues research from the Bank of International Settlements (BIS).
Given their reliance on generous funding conditions, Zombies are exposed to tightening conditions during financial crises. According to a January 2019 note from Scope Ratings, “risks from (…) zombies – companies kept alive by banks, investors and low interest rates – can be expected to increase during any major downturn. Scope anticipates challenges to ratings during the next major downturn, based on vulnerabilities from high debt levels and weak margins.”
Picture from Pixabay