Zombie Corporations: Over 10% Of Global Companies Depend On Cheap Fed Money

Authored by Mike Shedlock via www.themaven.net/mishtalk,

Ten percent of corporations survive only because central banks have kept real interest rates negative.

The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

In simple terms, Zombies are those firms that could not survive without a flow of cheap financing.

The above chart shows the median share of zombie firms across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US.

According to the BIS Quarterly Report one out of ten corporations in emerging and advanced countries is a "Zombie".

Let's dive into the report for more details.

The inability to come to grips with the financial cycle has been a key reason for the unsatisfactory performance of the global economy and limited room for policy manoeuvre.

 

Since 2007, productivity growth has slowed in both advanced economies and EMEs. One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates.

 

Over the past 10 years, there has been a close positive correlation between the growth of corporate credit and investment. A build-up of corporate debt has financed investment in many economies, particularly in EMEs, including high investment rates in China. Turning financial cycles in these economies could therefore weigh on investment.

 

As with consumption, the level of debt can affect investment. Rising interest rates would push up debt service burdens in countries with high corporate debt.

 

Moreover, in EMEs with large shares of such debt in foreign currency, domestic currency depreciation could hurt investment. As mentioned before, an appreciation of funding currencies, mainly the US dollar, increases debt burdens where currency mismatches are present and tightens financial conditions (the exchange rate risktaking channel).

 

Empirical evidence suggests that a depreciation of EME currencies against the US dollar dampens investment significantly, offsetting to a large extent the positive impact of higher net exports.

End of the Rate Hike Cycle

For the above reasons, I believe the end of the global recovery is at hand.

And when the next bust happens, the last thing central banks will be doing is raising interest rates.

 

Comments

2banana Mon, 12/18/2017 - 13:29 Permalink

ZIRP, HARP, QE1, QE2, QE3, Operation Twist, negative interest rates, massive obama deficits, bank bailouts, not one banker in jail, too big to fail… NAME THE CORPORATIONS!!!

dgc0101 2banana Mon, 12/18/2017 - 16:03 Permalink

Interesting list. The common denominator between all of them is that their future viability is based less on physical products and more on AI and cyberspace.They are about to find out that while the world of the quantum and electron is nearly limitless, the real world does indeed have constraints and is quite finite by comparison. But even their world will eventually fall to entropy, reducing it's value to zero as information becomes nothing more than thermal energy. Sorry for being so Shannon in my view.By the way, you forgot Facebook and Twitter.

In reply to by 2banana

LawsofPhysics Mon, 12/18/2017 - 13:54 Permalink

Duh!!!But no matter, such "let the majority eat cake" monetary and economic experiments have been tried before, we all know how this ends...Hedge accordingly.in the meantime..."Full Faith and Credit"

William Dorritt Mon, 12/18/2017 - 13:32 Permalink

Like the Titanic, the sinking corporations are sucking down the middle class with them. End the subsidies for these connected companies and liquidate them, there are plenty of medium and small companies ready to take their place.

VWAndy Mon, 12/18/2017 - 13:35 Permalink

 The really bad part is everyone is forced to compete with the likes of GM and Amazon. How can anyone compete with corperations that dont opperate on real profits. Dont get me started on Tesla. These zombies are dragging main street off a cliff. Scratch that they are bulldozing main street off that cliff.

MusicIsYou JRobby Mon, 12/18/2017 - 13:52 Permalink

The neat thing about digital money is it's almost impossible to not be able to control inflation and deflation. They can add or delete as much as they want to; make banks charge fees to hold your electronic digits (which is why most employers require direct deposit etc etc. The only reason banks want to go totally cashless is because cash gives the consumer control of money.

In reply to by JRobby

VWAndy Mon, 12/18/2017 - 13:41 Permalink

 I bet the amounts of fiat magic it takes to keep them alive is staggering. Add in the costs of the regulatory capture too. Talk about tossing main street under the bus.

MusicIsYou Mon, 12/18/2017 - 13:46 Permalink

Corporations will still survive on free Fed money even while interest rates climb because the charts don't matter and the interest rates will only be increasing in words only but not in reality.  The same way charts show we left the recession and yet people living in RVs in cities is an ever increasing issue.

MusicIsYou Mon, 12/18/2017 - 14:02 Permalink

Another way they control inflation and deflation is for example why it can take a few weeks to get a refund applied back to your debit card. Americans are just some blind motherfcks. Just be happy you're still getting refunds because someday it'll just get lost in liimbo and you'll never get it like how that family's $800,000 inheritance just disappear down the rabbit hole.

bshirley1968 Mon, 12/18/2017 - 14:12 Permalink

LMAO!  10%?  More like 80% are zombies and the other 20% are probably real.  There are entire INDUSTRIES that would crumble if it weren't for the free goobermint money they get.10% for the Fed10% for the BOJ10% for the PBC10%for the ECB10% for the BOE10% for the Bank of Canada, Australia, New Zealand, Irealnd, Scotland, and the other stepchildren of GB.There's 60% right there.

MusicIsYou Mon, 12/18/2017 - 14:20 Permalink

People better hope massive inflation doesn't show up because many peasant normal people will find that the fed just deletes their bank account to remove money from the system.

MusicIsYou Mon, 12/18/2017 - 14:30 Permalink

Bitcoin etc is actually helpinh to prevent inflation because it's removing real money from circulation or believe me they wouldn't let you have it. Most of that Cryptocurrency crap is merely a vent for the financial system. Anybody who knows what it really is knows it's not worth jackshit and that it will turn into a debacle.

D503 MusicIsYou Mon, 12/18/2017 - 14:45 Permalink

Bitcoin is a pet rock, a tulip, or any other useless construct that people are temporarily obsessed with. Just as with stocks, credit, or any other faith based intangible based on speculation of value rather than a determinate one based one actual function or resource. When people finally need the food, shelter, heat, or work done by the asset, they will find out how meaningless the bottle caps they've been collecting really are. You can't even wallpaper your home with digital currency.

In reply to by MusicIsYou

Stan Smith Mon, 12/18/2017 - 14:35 Permalink

10% ????  It's way more than that.    Maybe not directly.    But certainly indirectly.I can't decide if this is "Everything is Awesome!"Or if it's "Im shocked, SHOCKED to find gambling going on in here!"Either way,  this goes right up there with "Water is wet."

numapepi Mon, 12/18/2017 - 14:42 Permalink

Under a more laissez faire system the zombie firms would not build up. The churn, that is so hated by academian economists, "creative destruction," as it were, is the font of the dynamism of the market.

By holding them up, government suppresses real innovation, entrepreneurs and new products that would show up as a rise in productivity.

D503 numapepi Mon, 12/18/2017 - 14:57 Permalink

Assuming the laws of physics aren't a constraint, I'd agree with you. However, knowing that objects like "innovation and new products," which could compete in a market based on easiest first principles of consumption, have a need for an ever larger and larger energy source to offset the labor; if you can't point to a fuel source capable of replacing hydrocarbons as the highest yield, greatest volume of supply, then I'd say you have no product to bring to bear except a lie. Unless of course you've managed a way to get people to pay you for the honor of working for you. I hear salvation in the afterlife claims are a big money maker.

In reply to by numapepi

Give us Stirli… D503 Mon, 12/18/2017 - 16:09 Permalink

There is such a thing. THE STIRLING ENGINE!! The Stirling engine is a cheap engine that converts temperature differentials into motion. Modern solar panels are at most 16% efficient at converting the suns energy to electricity. A stirling engine has about 35+% efficiency and combined with evacuated tube/vacuum heat panels would produce at least twice the energy per surface area. It also doesn't degrade over time the way silicone wafers do.There's also solar powered air conditioning based off of the same tech that powers propane refridgerators, but you don't hear much about it. We could definitely get off the hydrocarbon addiction if only people knew of it.  

In reply to by D503