The Rise Of Zombie Companies (And Why It Matters)

Authored by Daniel Lacalle via The Mises Institute,

The Bank of International Settlements (BIS) has warned again of the collateral damages of extremely loose monetary policy. One of the biggest threats is the rise of “zombie companies.” Since the “recovery” started, zombie firms have increased from 7.5% to 10.5%. In Europe, BofA estimates that about 9% of the largest companies could be categorized as “walking dead.”

What is a zombie company? It is — in the BIS definition — a listed firm, with ten years or more of existence, where the ratio of EBIT (earnings before interest and taxes) relative to interest expense is lower than one. In essence, a company that merely survives due to the constant refinancing of its debt and, despite re-structuring and low rates, is still unable to cover its interest expense with operating profits, let alone repay the principal.

This share of zombie firms can be perceived by some as “small.” At the end of the day, 10.5% means that 89.5% are not zombies. But that analysis would be too complacent. According to Moody’s and Standard and Poor’s, debt repayment capacity has broadly weakened globally despite ultra-low rates and ample liquidity. Furthermore, the BIS only analyses listed zombie companies, but in the OECD 90% of the companies are SMEs (Small and Medium Enterprises), and a large proportion of these smaller non-listed companies, are still loss-making. In the Eurozone, the ECB estimates that around 30% of SMEs are still in the red and the figures are smaller, but not massively dissimilar in the US, estimated at 20%, and the UK, close to 25%.

The rise of zombie companies is not a good thing. Some might say that at least these companies are still functioning, and jobs are kept alive, but the reality is that a growingly “zombified” economy is showing to reward the unproductive and tax the productive, creating a perverse incentive and protecting nothing in the long run. Companies that underperform get their debt refinanced over and over again, while growing and high productivity firms struggle to get access to credit. When cheap money ends, the first ones collapse and the second ones have not been allowed to thrive to offset the impact.

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 — which 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. Policymakers 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.

The jobs and companies that they try to protect will disappear, and the impact on banks’ solvency and the real economy will be much worse.

Avoiding making hard decisions from a crisis created by excess and overcapacity ends up generating a much more negative effect afterward.

Comments

junction Wed, 08/09/2017 - 13:46 Permalink

Forget about zombie companies, lets talk about zombie news organizations.  For an example of how zombie  news organizations have become the propaganda mouthpieces for our degenerate rulers, go no further than the article by Kurt Andersen in the September edition of The Atlantic magazine.  Andersen was editor at Spy magazine, so you would expect more from him than the questionable factoids in this article.  You would be wrong, though.  The article heading is bizarre, consistent with the claptrap that follows, an attack on people whose beliefs and thoughts are not in lockstep with Andersen’s nor his Atlantic editors.  I subscribed to Atlantic magazine and I noticed that, out of the blue, it would sometimes have an article extolling some government agency, be it Homeland Security blackmailing Texas whores to get the goods on a drug dealing sheriff or how the Pentagon is fighting pollution.  Fantasyland stuff.  Andersen seems to have gotten his survey numbers from an unreliable source.  50% or more of Americans believe that the 9/11 attack was government orchestrated.  No one believes that Trump won the official popular vote but there are some that believe Trump lost the popular vote through election rigging of some sort.  Just like Kerry lost the popular vote in Ohio in the 2004 election through rigging of the Diebold voting machines there, a loss that cost Kerry the election.  And also cost the life of Michael Connell, the IT guru from Akron who knew too much about engineering the vote-rigging, dead in a still mis-investigated plane crash (like JFK Jr.’s) http://www.cbsnews.com/news/republican-it-guru-dies-in-plane-crash/   ---https://www.theatlantic.com/magazine/archive/2017/09/how-america-lost-i… How America Lost Its MindThe nation’s current post-truth moment is the ultimate expression of mind-sets that have made America exceptional throughout its history.by Kurt Andersen We have passed through the looking glass and down the rabbit hole. America has mutated into Fantasyland.  How widespread this promiscuous devotion to the untrue? How many Americans now inhabit alternate realities?                                            [edit]   A third of us believe not only that global warming is no big deal but that it’s a hoax perpetrated by scientists, the government, and journalists. A third believe that our earliest ancestors were humans just like us; that the government has, in league with the pharmaceutical industry, hidden evidence of natural cancer cures; that extraterrestrials have visited or are visiting Earth. Almost a quarter believe that vaccines cause autism, and that Donald Trump won the popular vote in 2016. A quarter believe that our previous president maybe or definitely was (or is?) the anti-Christ. According to a survey by Public Policy Polling, 15 percent believe that the “media or the government adds secret mind-controlling technology to television broadcast signals,” and another 15 percent think that’s possible. A quarter of Americans believe in witches. Remarkably, the same fraction, or maybe less, believes that the Bible consists mainly of legends and fables—the same proportion that believes U.S. officials were complicit in the 9/11 attacks.  

sgt_doom junction Wed, 08/09/2017 - 18:36 Permalink

No doubt he will be rewarded in the future in the manner that Chris Hayes (CIA asset) obtained his NBC position when he "debunked" that NAFTA transcontinental highway and Chinese-build Mexican deep water port, information obtained from CFR and Chamber of Commerce sites across the country.

In reply to by junction

TrumpXVI Wed, 08/09/2017 - 14:12 Permalink

I think that definition is too narrow and understates a bigger problem.There are many companies who have not made a profit in ten years, but because they CAN make interest payments on their debt and continue to raise money with bond issuance and bank loans, they are considered "healthy" ongoing concerns.I consider those companies to be zombies for all intents and purposes.

Deep Snorkeler Wed, 08/09/2017 - 14:19 Permalink

The Bank of International Settlementstalks a lot about risk to their industry.They never mention banking fraudand the fact that bankers have been fineda total of $321 billion since 2007for enumerable crimes.I guess we live in a fraud-based economywhere fraud is expected and necessary for business. 

Last of the Mi… Wed, 08/09/2017 - 14:27 Permalink

If your company manufactured a product and lost $10,000 per unit, never made a profit, had to have $2,500.00 stae credit just to encourage sales, and burned through billions of tax payer money on an annual basis. Would this be a zombie company? Just sayin

adr Wed, 08/09/2017 - 14:53 Permalink

Amazon has lasted 20 years as a zombie. Tesla is on year ten. Netflix eats brains of other healthy corporations as well. Are they on the list? 

lesterbegood Wed, 08/09/2017 - 17:36 Permalink

"The citizen does not benefit from the zombification of the economy. The citizen pays for it."Stop being a citizen/slave and you no longer have to pay. If you cannot act in spite of fear, then you are not ready for freedom.

Peak Finance Wed, 08/09/2017 - 19:02 Permalink

Hmmm this is a tough one:“media or the government adds secret mind-controlling technology to television broadcast signals,”I guess if you consider surgical application of peer pressure, emotional manipulation,  along with NLP  to be "secret mind-controlling technology" then the answer is YESWhats on the TV is called "programming" for a reason.  

DaveA Wed, 08/09/2017 - 22:34 Permalink

During the last year of the Weimar hyperinflation (Nov 1922 - Nov 1923), there were a grand total of ten bankruptcy filings in the entire country! Germany was awash in zombie corporations, most of which dissolved as soon as sound money was restored.