Wednesday, February 20, 2013

The Zombie Economy

A growing number of  so-called zombie companies are being created as a consequence of the current record low interest rates. America is filled with many small struggling companies that can sometimes afford only the interest payments on their loans, and not much more. There are zombie households, too - those on interest-only mortgages but unable to pay off the loan or move forward. Mark Thomas Author of The Zombie Economy says, "A zombie company is one which is generating just about enough cash to service its debt, so the bank is not obliged to pull the plug on the loan”.

A a company can limp along and survive, but still not generate enough money to invest. Many of these are doomed to failure if interest rates go up. There are concerns that banks are keeping these no-hope companies alive in order to avoid taking further, potentially significant losses - and this, in turn, could be holding them back from new lending, which is needed to boost the economy. The owner of one of these companies may be stuck with a huge amount of debt ran run up before the financial crisis. Since the credit crunch, banks often refuse to lend any more money leaving the owner in limbo and trapped in a demoralizing situation. The plunge in commercial property values has played its part in the zombie phenomenon.

Many economist acknowledge the difficult challenges, with property values plunging often more than a third since the top of the market many lenders are reluctant to pull the plug because they know they will struggle to sell the assets. We need to have bad businesses fail, otherwise the economy will stack up with progressively weaker business models and growth will go into reverse, Thomas goes on to say. Banks giving breathing space to borrowers - has been a matter of concern for regulators. Critics of the banks have urged banks to build up their capital reserves, so that they can more easily bear the losses when they pull the plug on zombie businesses.

Footnote; The problem remains that after all the money and low interest rates little has changed in the "real" economy

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