About 20 percent of U.K. companies and more than 16 percent of Germany’s are classified as “zombie firms” – the living dead.
A zombie company is one that has over-borrowed, is at risk of default, and must keep borrowing new money to pay off existing loans.
The ranks of zombies have been growing for two reasons.
European banks have held interest rates so low for so long that even high-risk companies have qualified for loans; and poorly capitalized banks have been tempted to roll over risky loans rather than write them off and show a loss.
Some zombies also have been kept alive by government bailouts, such as renewable energy giant Abengoa, which has been saved from oblivion by Spain’s government three times in the last five years.
The number of zombies has grown over the last six months as more companies borrowed to survive the economic shutdown while having little or no revenue.
Worldwide, non-investment-grade companies issued $322 billion in new debt from 1 January through 31 August, equal to the amount in all of 2019.
Britain’s zombies make up a third of Europe’s total, according to an analysis by Bank of America. In the kingdom’s lodging and restaurant sector, 23 percent of businesses are zombies, up 9 percentage points since March; in entertainment and recreation, the share has risen 11 points to 26 percent, reported Onward, a conservative think tank.
Every 1-percent increase in the ranks of zombie companies means a 0.25-percent slowdown in job growth and a 17-percent drop in the capital investment rate, the Bank for International Settlements has estimated.
Rather than lay zombies in their graves, Onward has proposed converting debt incurred as a result of the shutdown into “income-contingent” loans that a company would need to begin paying back only if and when it makes a profit. George Osborne, formerly head of the U.K. treasury, has suggested simply forgiving shutdown-related debt for small businesses.
Italy’s Unicredit Bank has suggested that the country pay off bad loans in return for an equity stake in the companies it bails out.
TRENDPOST: The impact of the global lockdowns is just starting to ripple across economies. The cheap money pumped into equity markets, industries, and the general public by governments has artificially and temporarily limited the true dimensions of the financial havoc the lockdowns have imposed on businesses and individuals.
