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Zombie companies cannot destroy the global economy – New York Fed research


Zombies scared ordinary citizens and investors even before the outbreak of the coronavirus. This is usually the name given to companies that are unable to cover debt service costs from long-term profits. The Bank for International Settlements (BIS) calculated that the share of zombie companies in the 14 major economies it studied had grown from 2% in the late 1980s to 12% by 2016. Interest rates on loans were declining, and banks did not want to cut off their oxygen. So they hovered for a long time between life and death for a long time, creating risks and uncertainty. This trend is not accidental. In fact, after the financial crisis of 2008, politicians decided that mass corporate extinction should not be allowed, since millions of citizens would immediately find themselves on the street. Unemployment will skyrocket with all the ensuing political consequences. To avoid a collapse, the authorities cut rates and eased lending conditions. Past mistakes were also taken into account. Back in 1929, Treasury Secretary Andrew Mellon advocated the mass liquidation of troubled companies to “cleanse the system of rot.” Anticipating Joseph Schumpeter’s theory of “creative destruction”, he argued that this is the best way to achieve restoration. Instead, the Mellon doctrine led to the depression of the 1929 crash. Fears on the heels However, many economists are concerned that the endless existence of weak companies carries real, long-term economic risks. In 2018, the BIS concluded that zombie companies were ineffective, investing less and consuming resources that could have been directed to more dynamic areas. And even aside from the zombie phenomenon, economists feared that rising corporate debt in general was limiting companies’ ability to invest. These fears have intensified since the onset of the coronavirus crisis. And one of the worst consequences of the pandemic will be the monstrous burden of corporate debt. Surprisingly few companies have gone bankrupt so far, thanks to very active responses from governments and central banks, with only the latter, according to the IMF, injecting more than $ 7 trillion into bond markets in stimulus. But in the end, according to the Institute of International Finance, corporate debt in developed countries jumped from a record level of 91% of gross domestic product in 2019 to 102% at the end of September 2020. While low interest rates can be tolerated, economists fear that over-indebtedness will remain a heavy burden on the global economy for years to come. But, according to an article published by the New York Fed this month, things are not so bad. Using a database of 17 countries dating back to the 19th century, Oscar Horda, Martin Kornezhev, Moritz Schularik, and Alan Taylor examined whether the accumulation of large corporate debt leads to deeper and longer recessions, as it usually does after the growth and reduction of household debt. farms or the financial industry. Paradoxical findings “There is no evidence that a corporate debt boom leads to a sharp decline in investment or output, and that the economy takes longer to recover than in other periods,” the article says. Economists also found no evidence that large corporate debt makes the economy less stable and prone to less frequent but more severe downturns. Why? The New York Fed article states that bankruptcy and debt restructuring conditions for companies are generally much more effective than those for individuals. The main thing is to act quickly. However, when lenders are unable to allocate resources and are aggressive, contracts are poorly enforced, or lawsuits are dragged out, this can impede rapid restructuring or liquidation. As a result, even more walking dead may appear. “Delays lead to underinvestment and continued existence of zombie firms, which could hinder aggregate productivity growth and slow recovery from recessions,” economists say. In other words, policymakers shouldn’t worry too much about low interest rates allowing some companies to stay in the twilight zone. Instead, they should ensure that bankruptcy and restructuring procedures are carried out quickly and efficiently. Prepared by based on the materials of The Financial Times On the subject: The IPO mania strongly resembles the dot-com bubble of the late 1990s The number of zombie companies is growing rapidly in the United States Economy on demand: a blessing of civilization or a hidden threat?


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