The rise of the zombie companies

Europe is in the midst of a “zombie company” revolution, where hundreds of thousands of firms, which should have folded due to colossal debts, are clinging on to solvency thanks to “government help, ultra-loose monetary policy and, often, the reluctance of lenders to write down bad loans since the crisis,” bemoans the Financial Times.

The economic daily quotes a business consultant saying: “The fundamental tenet of capitalism, which holds that some bad companies need to fail to make way for new and better ones, is being rewritten.” One in 10 UK firms can afford to repay only interest on loans rather than the capital sum. The newspaper adds –

In some parts of the continent the problem appears even more severe. The lowest rates of insolvency in 2011 were from Greece, Spain and Italy, the three countries whose economies have struggled most. Fewer than 30 in every 10,000 companies fail in these countries – this at a time when nearly one in three groups is loss-making.

Zombie companies are being blamed for Europe’s weak recovery, triggering fears the bloc may echo Japan, where low interest rates, loose government policy and big banks reluctance to foreclose on unprofitable companies has caused decades of weak growth. The newspaper continues –

In the US, where the philosophy of “creative destruction” holds more sway, there has been a swift increase in insolvency rates since the crisis. But this has been far less the case in Europe, where policy makers have been more focused on protecting jobs than on boosting efficiency.

The paper quotes a debt specialist saying –

Europe is like a forest floor that is being clogged with weeds, choking off nutrients and light to saplings with a chance of becoming trees. What Europe needs is a fire to clear out the undergrowth.