Friday, 6 December 2013

Zombie companies and zombie banks

One of the surprising features of the lengthy economic crisis has been the low rate of corporate insolvencies. One theory has been that the UK is full of zombie companies that can't grow and are only kept alive by ultra-low interest rates.  Some even think that a rise in rates would be a good thing because it would kill off a lot of these businesses, allowing room for more viable businesses to grow.

In a Pieria article, Frances Coppola takes a look at the evidence and pretty much demolishes this argument.

"...lots of businesses don’t grow. Indeed, the majority of microbusinesses – sole traders and firms with fewer than 9 employees – not only don’t grow but have no desire to do so. Are they zombies? No. They are active economic agents contributing to the economy. We really can’t use the absence of growth as an indication that a company is not viable. Many of these companies happily bump along the bottom for decades...."

"...because it is widely believed that zombies are kept alive not just by low interest rates, but by damaged banks unable to take losses, there are calls for banks to “end forbearance” even if it means they fail themselves. This is madness. Every bank and building society in the UK has corporate debt on its books,  and almost every bank and building society in the UK has a damaged balance sheet which could not cope with large amounts of insolvencies. So banks cannot “end forbearance”.  Nor do we wish them to do so.  

Widespread losses across the entire UK banking sector would catapult the UK back into deep recession. I am no fan of damaged banks – indeed I have called for them to be bypassed so that the UK economy can get the credit it desperately needs. But that doesn’t mean that it would be sensible to bankrupt them all.

So it seems there is little evidence for the existence of zombie companies. But there is considerable evidence for the existence of zombie banks."

Great analysis from an economist who understands the real world.