The living dead: Zombie firms feed into economic lifelines

They are the living dead, waiting for the elusive revival. They are zombie firms, creations of easy credit and beneficiaries of central bank largesse.
A zombie firm typically refers to a company that doesn’t earn enough to pay its interest costs for an extended period.
The rise of zombie firms has been linked to the era of easy money the US Federal Reserve and other central banks ended last year when they rapidly raised interest rates.
Now, tighter money threatens to create new zombies and kill off others that had been barely holding on. But central bankers face tricky balancing acts as they try to cool inflation without swelling the ranks of the financially undead.
An estimated around 15% of listed firms in developed nations were considered zombies as of 2017, up from about 4% in the late 1980s, according to a study by the Bank for International Settlements (BIS).
A Goldman Sachs analysis in 2022 estimated that some 13% of firms based in the US could be zombies. A Fed study showed the number of zombies among listed firms hovering around 10% between 2000 and 2020, with higher numbers during recessions.
In the US, their ranks have swelled in recent years, comprising roughly a fifth of the country’s 3,000 largest publicly-traded companies and accounting for about $900bn of debt as of May 2022.
The European Bank for Reconstruction and Development estimated that in the years before the pandemic, roughly 5% of companies there could be classified as zombie firms.
Since 2016, China has pushed supply-side reforms that have sought to cull the number of zombies.
Central banks opened spigots wide to keep the global financial crisis of 2008 from triggering a depression, using low interest rates and other measures to try to stimulate business activity.
They kept rates low for years in the face of a notably anaemic recovery, then opened the faucets again when the pandemic struck: The Fed cut interest rates back to near zero and didn’t raise them until March 2022.
The unparalleled era of easy money came to a screeching halt in 2022, as central banks shifted gears to subdue inflation: The Fed raised its benchmark rate from near zero to 4% in a mere six months.
That speed led to worries that something in the financial system would break, as the tightening of credit revealed previously hidden vulnerabilities.
Those fears seemed to materialise in the failure of two US banks, and the buyout of global giant Credit Suisse.
A rise in debt-service costs can tip a vulnerable company into zombie status, and interest rates have been going up around the world.
For example, some 36% of South Korea’s publicly traded developers struggled to service debt fully last year, up from 29% in 2021, according to the Bank of Korea. There are fewer of them in nations where borrowing costs remain very low.
About 13% of Japan’s companies were considered zombies in the year that ended in March 2022, according to research firm Teikoku Databank Ltd. While that’s up from 9.9% two years ago, the ratio remains relatively low in Japan, which has been the exception to many central bank trends: The Bank of Japan’s aggressive monetary easing has kept borrowing costs down.
Trapped in a cycle of stagnant growth and productivity, zombie companies suck up capital that could otherwise be used by innovative companies to invest in new products and services.
Zombies trap assets and employees, making life harder for start-ups, slowing innovation. And their existence lowers margins, making investing in healthy competitors less attractive.
While the economically efficient thing to do with zombies is to put them out of their misery, the long persistence of the phenomenon is a sign of how hard shutting them down can be.