Zombie Corporations Litter Europe, Kept Alive By ECB

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!


illuminatus (not verified) El Oregonian Sun, 07/30/2017 - 14:51 Permalink

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?

In reply to by El Oregonian

Vageling Future Jim Sun, 07/30/2017 - 16:58 Permalink

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.

In reply to by Future Jim

Haitian Snackout Sun, 07/30/2017 - 14:48 Permalink

Plastic crap from China try to steal your mind's elationAnd little girls from Swedenleft with muslim molestationAnd if you want these kind of dreamsIt's EU zombication

Atomizer Sun, 07/30/2017 - 14:48 Permalink

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

flyonmywall Sun, 07/30/2017 - 14:57 Permalink

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 Sun, 07/30/2017 - 14:57 Permalink

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.

brushhog Sun, 07/30/2017 - 15:03 Permalink

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.

GooseShtepping Moron Sun, 07/30/2017 - 15:16 Permalink

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 GooseShtepping Moron Sun, 07/30/2017 - 15:31 Permalink

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.

In reply to by GooseShtepping Moron

rmopf2010 True Blue Sun, 07/30/2017 - 17:42 Permalink

I absolutely agree with your comment and almost everything with GooseShtepping MoronThe 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 kidshttp://www.zerohedge.com/news/2017-04-20/40-spanish-children-live-pover… is good for boomers yeah !! let the kids starveDon'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~62Life 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 !!!!!!! 

In reply to by True Blue

OverTheHedge GooseShtepping Moron Sun, 07/30/2017 - 15:58 Permalink

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.

In reply to by GooseShtepping Moron

brushhog OverTheHedge Sun, 07/30/2017 - 16:05 Permalink

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 ;

In reply to by OverTheHedge

rmopf2010 brushhog Sun, 07/30/2017 - 17:45 Permalink

I understand you. The downward pressure on oil prices is already making damageshttps://www.bloomberg.com/news/articles/2016-08-29/oil-discoveries-at-a… is just begining to foldhttp://www.zerohedge.com/news/2017-06-29/saudi-arabia%E2%80%99s-march-t… 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 implodeWhen 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.

In reply to by brushhog

theprofromdover GooseShtepping Moron Sun, 07/30/2017 - 15:58 Permalink

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.

In reply to by GooseShtepping Moron

ReturnOfDaMac GooseShtepping Moron Sun, 07/30/2017 - 16:20 Permalink

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...

In reply to by GooseShtepping Moron

webmatex GooseShtepping Moron Mon, 07/31/2017 - 06:06 Permalink

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. 

In reply to by GooseShtepping Moron

kenny500c Sun, 07/30/2017 - 17:03 Permalink

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.