Zombies Finance

Zombie finance, a chilling term for a concerning economic phenomenon, refers to the situation where businesses, organizations, or even entire economies are barely surviving, propped up by artificial support rather than genuine profitability. They are, in essence, the walking dead of the financial world.

The roots of zombie finance often lie in easy credit conditions and low interest rates. When borrowing is cheap, struggling entities can access loans to cover operating losses, refinance existing debts, and delay the inevitable. This creates a cycle of dependency where these “zombie” entities remain afloat, draining resources and hindering the growth of healthier, more productive businesses. The term gained significant traction following the Japanese asset bubble burst in the 1990s, where government-backed loans kept numerous companies alive despite their fundamental insolvency.

A key characteristic of a zombie company is its inability to cover interest payments on its debt from its operating profits. Instead, they rely on rolling over the debt, essentially borrowing more money to pay off the interest on existing loans. This unsustainable practice diverts capital away from viable businesses that could be investing, innovating, and creating jobs. It also distorts market signals, making it difficult to assess the true health of the economy.

The consequences of zombie finance are far-reaching. Firstly, it dampens productivity growth. By keeping unproductive firms alive, resources are misallocated, preventing capital and labor from flowing to more efficient enterprises. This ultimately leads to lower overall economic growth. Secondly, it exacerbates inequality. Zombie companies often maintain artificially low wages to stay afloat, suppressing wage growth for workers and widening the gap between the rich and the poor. Thirdly, it increases financial instability. The buildup of unsustainable debt in zombie entities creates a fragile financial system susceptible to shocks. When interest rates eventually rise or credit conditions tighten, these zombie companies are likely to collapse, triggering a domino effect throughout the economy.

Identifying and addressing zombie finance requires a multi-pronged approach. Regulators need to be vigilant in monitoring corporate debt levels and enforcing stricter lending standards. Governments should resist the urge to bail out failing companies, allowing market forces to operate and weed out unproductive entities. Instead, they should focus on creating a favorable environment for new businesses to emerge and thrive. Structural reforms, such as improving labor market flexibility and promoting competition, can also help to reduce the prevalence of zombie companies. Finally, investors need to be wary of companies with high debt levels and weak profitability. Due diligence and careful analysis are crucial to avoid investing in zombie entities that are destined to fail. In a world of zombie finance, caution and prudence are essential for survival.