Zombie Corporations Litter Europe, Kept Alive By ECB

Tyler Durden's picture

Authored by Mike Shedlock via MishTalk.com,

Bank of America says 9% of European firms have subpar interest coverage. Bloomberg covers the story in its report Zombie Companies Littering Europe May Tie the ECB’s Hands for Years.

Watch out for the zombies.

 

The plethora of companies propped up by the European Central Bank will limit policy makers’ ability to withdraw monetary stimulus that’s been supporting the continent’s bond market since the financial crisis, according to strategists at Bank of America Corp. About 9 percent of Europe’s biggest companies could be classified as the walking dead, companies that risk collapse if the support dries up, according to the analysts.

 

“Monetary support in Europe over the last five years has allowed companies with weak profitability to continue to refinance their debt and stave off defaults,” analysts led by Barnaby Martin wrote in a note Monday. “This supports the point that our economists have been making: that the ECB will likely be very slow and patient in removing their extraordinary stimulus over the next year and a half.”

 

The strategists classify zombies as non-financial companies in the Euro Stoxx 600 with interest-coverage ratios — earnings relative to interest expenses — at 1 or less. The thinking goes that companies in this category are particularly vulnerable to rising interest rates.

 

The ECB’s dovish tone last week — pushing back the timing for a decision on the future of its bond-buying program until possibly October — confirms it will embark on a gradual pace of tightening in order to juice the economic recovery, according to Bank of America. It reckons the ECB’s taper will start in January 2018, with the first increase to the deposit rate projected in the spring of 2019, compared with consensus expectations for a hike in October 2018, according to overnight index swap contracts compiled by Bloomberg.

 

Similar studies confirm zombie firms litter the landscape across developed markets, and place the blame squarely on loose monetary policy. Last month, the Bank for International Settlements calculated businesses more than 10 years old whose earnings don’t cover interest expenses represent almost 10.5 percent of publicly listed companies across 13 advanced economies, compared with less than 6 percent pre-crisis.

Negative Progress

Right before the collapse of Lehman, about 6 percent of European companies had a coverage ratio of less than 1.

Last month, the Bank for International Settlements calculated businesses more than 10 years old whose earnings don’t cover interest expenses represent almost 10.5 percent of publicly listed companies across 13 advanced economies, compared with less than 6 percent pre-crisis.

Why Zombies Matter

Daniel Lacalle explains Why Zombies Matter

Low interest rates and high liquidity have not helped deleverage. Global debt has soared to 325% of GDP. Loose monetary policies have not helped clean overcapacity, and as such zombie companies perpetuate the glut in many sectors, driving down the growth in productivity and, despite historic low unemployment rates, we continue to see real wages stagnate.

 

The citizen does not benefit from the zombification of the economy. The citizen pays for it. How? With the destruction of savings through financial repression and the collapse of real wage growth. Savers pay for zombification, under the mirage that it “keeps” jobs.

 

Zombification does not boost job creation or buy time, it is a perverse incentive that delays the recovery. It is a transfer of wealth from savers and healthy companies to inefficient and obsolete businesses.

 

The longer it takes to clean the overcapacity -whcih stands above 20% in the OECD- and zombification of the economy, the worse the outcome will be. Because, when the placebo effect of monetary policy disappears, the domino of bankruptcies in companies that have been artificially kept alive will not be offset by the improvement in high added-value sectors. Policy makers have decided to penalize the high productivity sectors through taxation and subsidize the low productivity ones through monetary and fiscal policies. This is likely to create a vacuum effect when the bubble bursts.

Damned Either Way?

Bank of America provided the kicker: The ECB risks a big backlash if it were to tighten policy prematurely. Allowing a “credit tantrum to take hold would only pressure corporate interest costs again, and risk a rise of the zombie.”

Thank you not, central banks!

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GUS100CORRINA's picture

Zombie Corporations Litter Europe, Kept Alive By ECB

My response: Zombie Corporations Litter America too Kept Alive By the FED

Future Jim's picture

I must have missed where he said that the ECB and the Fed are illegitimate criminal organizations and should not exist.

El Oregonian's picture

The ECB and FED, and all central banks for that matter, now there's a brainless bunch.

 

Future Jim's picture

 

The ECB is illegitimate and should not exist.

The ECB just needs to tweek its policies.

Stuck on Zero's picture

Central banks are nothing but drug dealers of a different kind. They trade cash for souls.

HillaryOdor's picture

Zombie institutions for zombie populations.

It's fitting.  The dead don't need a functional economy.

webmatex's picture

Zombie institutions, vampire banks, voodoo economics, illuminati bankers...

They do their gods work.

Vageling's picture

Sure. Some National CB's (which are owned by the state, unlike the FED) have been warning for that. But those screaming kids, eh? Like Italy for one. Nothing will change. QE all the way beyond the Milky way! Fuck the stars.

illuminatus's picture

Well yeah, that's what they want us to think, that they are just befuddled academics doing their best at their jobs to fulfil their mandate. Now really,sir or madam, do you think that is actually the case, or could it be that just maybe they know exactly what they are doing?

Future Jim's picture

They know exactly what they are doing -- or at least -- their masters know exactly what they are doing.

Vageling's picture

Bingo! Because the ECB shareholders (The EUR countries) have no input. Saw enough reports where they question the strategy. And the former Greek Finance minister Varoufakis blowed the whistle on how figures that should not be there actually are. It's all a scam which makes it inrellevant who 'owns' the banks in theory. 

Question is. How are they trying to 'rob' us in their endgame. This QE has a purpose. And it's not what they claim it to be. Most of their scams are known. And their not done by a long shot.

toady's picture

Nice. Way to work in the zombie meme.... walking dead fans will love it!

karenm's picture

I dont believe a word the ECB, FED, or any central banker says about earnings or the state of the economy.  They couldn't tell the truth if their life depended on it. 

Horse Pizzle's picture

Deutsche Bank and Volkswagen.

Haitian Snackout's picture

Plastic crap from China 

try to steal your mind's elation

And little girls from Sweden

left with muslim molestation

And if you want these kind of dreams

It's EU zombication

SokPOTUS's picture

Nice RHCP ref.

Ecbafornication

Atomizer's picture
If things don't get better, i'll say fuck it and go ‎full blown black hat hacker mode. He's my president.  I will protect him.  White hat hackers have to go back to fuck people up interfering with are President Donald Trump. Then expose them.  If DNC keeps pushing envelope, time is not on their side. Staying neutral for now. ‎We will rip them a new asshole if necessary. And our entire army can't be stopped! It's that serious. If no one at high level goes to jail, all bets are off. That simple.  Death In June - Tick Tock - YouTube
ebworthen's picture

This is the purpose of Central Banks, to prop banks/corporations/insurers while bending over the majority of the citizenry.

flyonmywall's picture

The bankers bail out the zombie corporations because their friends and their spouses all sit on the boards of those corporations drawing fat salaries and stock options. They prop up the stock market of the moneyed interests, not the plebes.

It's a big club, and you ain't in it. Wise man once said that. His name was George Carlin.

You are getting fucked every which way from Sunday.

 

EndOfDayExit's picture

Why exactly is it a mirage? It is the only way left of letting a large number of people make a living. Arguably, it is better to subsidize 10% of ones income than it is to subsidize 100% of it. Sure, this is not capitalism. But capitalism requires those who are no longer needed to die. Good luck with this approach! We're heading to some form of socialism - CBs will eventually buy 51% of all productive enterprises and will then give it all to the State. Task accomplished.

Atomizer's picture

Just like that Muslim mayor piece of shit. All electric cars. What a fucking moron. 

Bankrupt - How Cronyism and Corruption Brought Down Detroit

https://m.youtube.com/watch?v=IuOEf-pNXUI

Taking down UK for Sharia law. I don't think what we find and expose will be forthcoming for him. Brexit will remain. 

brushhog's picture

2 decades ago I sat in a college economics class listening to our 70 year old professor. Some teachers have a way of explaining things that just clicks and makes sense. I always remember him saying that "an economy is like breathing, it has to expand and contract". And he showed us an enlarged printout mounted on a foam board displaying historical expansions and contractions. It looked like an EKG or a heart monitor. Up and down. Thats how you know it's alive.

The attempt to keep it up perpetually seems like taking in a huge gulp of air and trying to hold it as long as you can. You can keep the expansion for a pretty long while, but the longer you hold it the more the pressure builds. If you wait long enough it all comes imploding out in one big, painful contraction with all the pent up energy blowing out all at once.

Best to leave the breath to natural unconscious forces. The conscious mind is incapable of controlling it.

Twee Surgeon's picture

B of A. 'Look over there, is that a Squirrel ?'

OpenThePodBayDoorHAL's picture

I had bacon and eggs for breakfast, I was going to just have eggs but there was a little bacon left over so I said what the heck. The toast was burned a little on the edges. I also had some chipotle sauce on it.

A. Boaty's picture

Capitalism without failure looks like Christianity without Hell.

GooseShtepping Moron's picture

Yes, we are damned either way. And I know a lot of ZHers aren't going to like to hear this, but the problem is not entirely the fault of the central banks. The issues are much more fundamental and structural than mere monetary policy. The real drivers are demographics, Peak Debt, globalism, and the diminishing returns of industrialization.

In a certain sense, the central banks actually did avert a catastrophe. They did exactly what they set out to do, i.e. prevent an avalanche of defaults which would have collapsed the financial system and taken a good portion of the physical economy down with it. You can, of course, argue the counterfactual: that it would have been better to suffer a severe but brief depression rather than to zombiefy the economy by unleashing torrents of QE. There are merits to both sides of the argument, but what most people seem to miss is that this is a true dilemma in the technical sense of the word. There is no way out of this. You can either do X or ~X, but both X and ~X lead to the same undesirable outcome.

We have an ageing, declining population that is heavily indebted. Also, the massive productivity gains that enabled the rise of industrial societies in the 19th and 20th centuries are not going to be repeated. That means that we cannot "grow" our way out of the economic doldrums. Had QE and loose monetary policy never been enacted, we would not be any better off today.

On the other hand, we cannot "print" our way out of the problem either. The Keynesian argument for juicing the animal spirits does not work in a world that has already achieved Peak Debt. In reality, there is probably only a very limited range over which it ever worked anyway, and we are well outside those parameters.

On the third hand, the idea of a "debt jubilee" isn't going to work either, as that would result in a currency collapse. It would obliterate whatever savings still remained and would punish the creditor along with the debtor.

Anybody who promises an easy solution is lying. We are at the end of the growth era. Stagnation and decline are inevitable no matter what we do, and we just have to embrace this as our painful reality.

True Blue's picture

But the core of the demographic argument still comes back to the central bank and the taxes and (hidden tax of) inflation it causes. Stealing 1/3 of people's labor directly and devaluing what remains year after year creates a situation where people postpone families until they can afford to have kids -resulting in demographic decline and an aging population. QED -it all comes back to the fraud 'money' and the CB's.

rmopf2010's picture

I absolutely agree with your comment and almost everything with GooseShtepping Moron

The end point is: we are beting on the past instead of the future.

Boomers are not afeted by nothing! on the other hand young families are starving their kids

http://www.zerohedge.com/news/2017-04-20/40-spanish-children-live-poverty

Europe is good for boomers yeah !! let the kids starve

Don't touch boomers pension they want to have holidays all year round !!

Besides the fact that working age people are  paying pensions they won't have ! Because retirement age at that time will be greater than 70 and social security will be dead broke when they retire.

Boomers retired between 55year~62

Life expectation will reduce drastically ! didn't anyone notice food is getting worse by the day ?

Yeah "cost savings" to pay taxes for big government/welfare state !!!!!!!

 

BullionBlast's picture

Yes, and if this all comes down Prince Draghi may well find himself before a not-so-friendly Tribunal. He will deeply regret his "Whatever it takes" quote.

OverTheHedge's picture

A good synopsis of the situation. Where do we go from here? Either deflation, or inflation, or a completely fabricated worldwide economy. I'm not sure what the third option entails for the general population, but deflation can never happen (income earners benefit at the expense of asset owners = forbidden), so inflation seems to be the only option. My current theory is crash followed by Universal Basic Income (ie helicopter money), but we could just float along on a bubbly froth of make-believe pretend economic activity, although I assume that this will lead to the slow impoverishment of everyone not connected. I'm open to better predictions, because God knows I don't understand the current system.

brushhog's picture

Nobody understands it. My current theory is recession leds to downward pressure on oil prices, which leads to oil producers going bankrupt, which leads to oil prices whipsawing upwards, which leads to mass inflation and shortages, which leads to further erosion of the economy, which leads back to step 1. I believe we are about to enter a death spiral that will take us through 80 years of collapse, war, dictators, communism, and complete ruin...or, we just keep limping along ;

rmopf2010's picture

I understand you. The downward pressure on oil prices is already making damages

https://www.bloomberg.com/news/articles/2016-08-29/oil-discoveries-at-a-...

KSA is just begining to fold

http://www.zerohedge.com/news/2017-06-29/saudi-arabia%E2%80%99s-march-to...

http://www.zerohedge.com/news/2017-07-19/inside-story-how-saudi-kings-so...

http://www.zerohedge.com/news/2017-07-27/saudi-power-balance-knife-edge

destiny's irony ! You can print fiats €$ etc, but you can't print oil !

At some point there will be shortages like in the 70's and thats when this house of cards will implode

When you'll have to pay a million USA/EU bucks for a gallon of gas.

Venezuela all was good when WTI/Brent was at 120$ now they are eating their animal pets.

rmopf2010's picture

"slow impoverishment of everyone not connected"

We're already here for the past 4 years!

Big government jobs their wages are the same.

Welfare state is the same

Private workers more taxes which leads to minor income.

theprofromdover's picture

All true, but we should've taken the pain;

lowered standards of living,

let the banks fail and the protected investors suffer,

keep interest rates at a level that would have protected the savers,

break up the monopoly corporations,

break up the banks that survived,

and halved government budgets.

 

One day we will do that, but only when the cheats and liars have exhauseted every other cheap and dirty move.

ReturnOfDaMac's picture

Not so sure about that Goose.  Treasury can, at any time, order the US Mint to mint up 20, One Trillion USD 1000 oz gold/platinum coins and declare them legal tender.  Banks HAVE to accept. Problem solved, full stop.  I've heard the argument about the "inflation" this would cause, the argument is smoke.  We printed up $20T by creating the deficit.  What happened?  Everybody else did the same thing hence no inflation and no major currency imbalance.  The economic impulse response will be quickly muted.

The paper ponzi we pulled off did inflate asset prices, health care and real-estate though.  Not much you can do about that anyway.  But in a global economy, you can't raise prices on discretionary items. Someone somewhere will undercut you.  I would much prefer that than any more QE or god forbid negative interest rates(another way of saying the banks just take your money). 

It's a hell of an experiment that we should probably try before the deficit hits $30T...

webmatex's picture

Disagree.

It was never an economic problem it was rampant financial crime which started when the deregulated financial services and banking starting in the 80's.

The pension funds were herded into the city and wall street and plundered (thats why no pensions left) combined with inflated stock markets caused by granpa greenspan, enron and savings and loan theft, and of course MBS crap that finally collapsed the entire maket in 2008 and lead to negative interest rates (diminished savings) and the concept of bail ins (its gone) and the death of capital.

CRIME.

The economy would be fine if all that CRIME hadnt happened, nothing to do with demographics and retiring boomers or some fancy economics theory going astray.

CRIME. CRIMINAL BANKS. CRIMINAL POLITICIANS.

 

VWAndy's picture

 Yes the stupid is very well funded.

  Stupid should hurt.

malek's picture

Look, a distraction from the American Zombie Corporations!

Rebelrebel7's picture

I love it when the Tylers go after the central Banks!

MAGA!

webmatex's picture

Fake.

I have to wonder so many things but the rendevous of the lunar module with the lunar orbiter at 4500 mph and then the never seen space walk from capsule to module in space suits (6 times) really takes the cake.

flemsnopes's picture

Will it be a problem if Bitcoin goes to $500,000?

debtor of last resort's picture

Will it be a problem if Ripple goes to BTC 500.000 ?

Last of the Middle Class's picture

How the hell do you log out of here on mobile? I've been stuck in here a week!

kenny500c's picture

Nothing less than welfare for the rich, fat salaries, bonuses and inflated stock and bond prices courtesy of the taxpayer.

But hey, they get free health care.