MoneyBestPal Team
A term used to describe companies that are unable to pay off their debt and barely survive by earning just enough to cover their interest payment.
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Zombies are a word used to characterize businesses that are unable to repay their debt and are only able to make enough money to pay their interest. These businesses frequently lack efficiency and profitability and are reliant on low-cost loans from banks or governments.

Due to their tendency to displace more productive businesses and obstruct the effective distribution of resources, zombies are a threat to economic growth, innovation, and financial stability.

Causes of Zombie Firms

Zombie firms can emerge for various reasons, such as:
  • Low-interest rates: When loan rates are low, banks can be encouraged to invest in zombie businesses rather than eradicate their bad debts or raise capital requirements. Low-interest rates enable zombie enterprises to refinance their debt and make borrowing less expensive.
  • Government support: When a company is deemed too big to fail, politically sensitive, or crucial for social welfare, governments may step in to bail it out. Subsidies, guarantees, exemptions from taxes, and regulatory leniency are all examples of ways that the government can assist.
  • Market frictions: Zombie businesses may profit from factors like market dominance, network effects, or switching costs that keep out new competitors or more effective ones. Moreover, zombie businesses may make use of moral hazard or knowledge asymmetries to raise money from uneducated or protected investors.

Consequences of Zombie Firms

Zombie firms can have negative effects on the economy and the financial system, such as:
  • Lower productivity and innovation: Zombie businesses typically have poorer productivity and profitability than non-zombie businesses, and they make fewer investments in R&D, human capital, and physical capital. By vying for customers, suppliers, labor, credit, or market share, zombie businesses also hinder the creativity and productivity of thriving businesses.
  • Higher debt and financial instability: The economy is more prone to shocks and has higher debt overall as a result of zombie businesses. In addition, zombie businesses harm the profitability and balance sheets of the banks that lend to them, and they may start a cycle of evergreening loans and forbearance.
  • Lower inflation and monetary policy effectiveness: Zombie firms contribute to lower inflation by depressing aggregate demand and putting downward pressure on prices and wages. Zombie businesses impair the interest rate channel and create a liquidity trap, which decreases the transmission and efficacy of monetary policy.

Solutions for Zombie Firms

Zombie firms can be addressed by various policy measures, such as:
  • Higher interest rates: Increasing interest rates can make it more expensive for zombie businesses to obtain money, forcing them to reorganize or leave the market. Increased interest rates can also help banks be more profitable and more willing to take on risk, which will encourage them to lend to businesses that are more productive.
  • Bank recapitalization and resolution: Banks can decrease their exposure to zombie companies and increase their ability to lend by strengthening their capital and liquidity situations. Financial stability can be enhanced and resources can be released by resolving insolvent or non-viable banks.
  • Structural reforms and fiscal consolidation: Structural reforms can be implemented to lower obstacles to entry, promote innovation and market entrance, and eliminate distortions that benefit zombie enterprises. Consolidating public finances might help lessen the cost and moral hazard that come with supporting zombie businesses.