Researchers Believe 12 Percent of All Public Companies Are 'Zombies'

By:
Chris Gaetano
Published Date:
Sep 3, 2019
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Recent economic research indicates that 12 percent of all public companies worldwide are, effectively, zombie companies, which, by all reason, should not still be in business, yet persist nonetheless, according to Fortune. This was the conclusion of the Switzerland-based Bank for International Settlements, which defined a zombie company as one that cannot cover its debt service costs with current earnings. The bank also said that the condition has been spreading, as such companies made up only 2 percent of the population in the 1980s. 

The researchers say that one of the major culprits is the long era of historically low interest rates. Because credit is so cheap, banks find it easier to keep failing companies on life support and hope that they will recover than it is to watch them collapse, which would then force them to write off the loan. Yet these companies are likely creating a drag on the global economy by continuing to exist: much as movie zombies feast upon brains that their victims could have still used themselves, zombie companies soak up resources that could have gone to more efficient ventures. 

If this understanding is correct, that means there is a cure for zombie companies, though it may be worse than the disease: a recession. At that point, according to Fortune, balance sheet fundamentals become much more important, and zombie companies tend to do poorly on this front. This would serve to break the illusion that these companies are still functional as their supply of life-sustaining credit dries up. But this development, in turn, could negatively affect other parts of the market, such as index funds, which could serve to deepen an economic downturn. The best-case scenario would be to gradually wind down zombie companies so that when a recession does hit, the impact wouldn't be as large. But given that it seems likely that the era of low interest rates will continue, banks will probably be creating even more zombies until a shock forces them to stop. 

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