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20 Percent of Largest Public Firms Now Zombies

Chris Gaetano
Published Date:
Nov 17, 2020
The horde of zombie companies—that is, firms that cannot survive on their own without constant infusions of new credit—has grown to the point where 20 percent of the largest public companies are now among their ranks, according to an analysis by Bloomberg.

Zombie companies are not a new problem. Last year, the Swiss Bank of International Settlements estimated that 12 percent of public companies were financially undead. Their numbers swelled, however, amid the pandemic's economic chaos; many companies, faced with utter ruin, were forced to borrow money in order to survive, whether through bank loans or bond issuances. In June, Deutsche Bank estimated that, due to the pandemic, 18 percent of U.S. firms could be considered zombies. If Bloomberg's analysis is correct, then this means the number has gone up by 2 percentage points since the summer.

Bloomberg noted that these zombies have gorged on some $1 trillion since the onset of the pandemic, bringing their total debt load to $1.36 trillion, more than double the $500 billion that zombie companies owed at the height of the financial crisis. Many of the new zombies are from industries that have been hit particularly hard by the pandemic, such as Delta Airlines, Macy's, Boeing, and Carnival Cruises. None of them is earning enough to pay interest expenses, which is what makes them zombie,s as they will not be able to stay open without further borrowing to cover costs.

The rise of the zombie horde is largely an artifact of the Federal Reserve's emergency policies instituted earlier this year. A combination of near-zero interest rates and a pledge to buy corporate debt in any amount needed to shore up the economy, has made credit dirt cheap, which has enabled these companies to keep borrowing with little cost or consequence. The Fed took these actions to prevent the credit market from freezing up, but, given the rise of undead companies as a result, it may have been a Faustian bargain.

The problem with zombie companies is that they take up resources that might have gone to more efficient firms, thus depressing overall economic competitiveness. One 2018 study found, after controlling for cyclical effects, that within industries over the period 2003–2013, a higher share of industry capital sunk in zombie firms is associated with lower investment and employment growth of the typical non-zombie firm and less productivity-enhancing capital reallocation. This is due, said the paper, to market congestion, which limits the expansion possibilities of healthy incumbent firms, creates barriers to entry for new players and constrains the post-entry growth of young firms.

Another study from that same year found that the easy access to credit that creates zombie firms can allow "less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators." Even though easy credit also helps entrepreneurs innovate, the researchers believe it can, and has, done long-term economic damage, saying that the "decline in productivity growth in most advanced countries since the 1970s may indeed be partly related to an overall easier access to credit due to financial liberalization over the period" and that "[t]his mechanism may have been amplified by the decrease of interest rates and the capital abundance observed in the last decade."

Another major issue, noted Bloomberg, is that the central bank can't keep this up forever (others may disagree). So then what happens when the Fed closes the taps? All those companies that had been surviving on a diet of cheap credit suddenly lose their lifeline, which means we'd see a lot of companies just collapse. In this sense, Fed policy keeping debt cheap is something that, if not handled well, may simply forestall rather than prevent another economic crisis.

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