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'Zombie' danger in Europe

Wednesday, July 03, 2013 - 02:31

July 3 - The ECB is expected to keep interest rates low on Thursday to help Eurpope's economy. But as Hayley Platt reports perpetually low rates aren't always good. They've created thousands of 'zombie' companies which are only able to exist in a low rate climate.

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They're a 21st century phenomenon - so-called zombie companies - that can neither invest nor innovate. They exist by only paying off the interest on their debt, often shedding jobs along the way and becoming a drain on the economy. Low interest rates have fuelled the phenomenon in Europe - in the past companies were killed off more quickly by higher rates. David Steinberg is an insolvency specialist at Clifford Chance. SOUNDBITE: David Steinberg, Partner, Clifford Chance, saying (English): "It's got too much bank debt and as a result of that it can't move on. So the existing shareholders are sitting on a loss and therefore don't want to invest any more money in the venture whilst the creditors who are usually banks are unwilling to crystallize their losses for a variety of reasons. So the company is essentially stuck hence the term zombie." Luxury motorboat builder Fairline was heading that way until 2011. But after the Royal Bank of Scotland and turnaround firm Better Capital bought the business, the sick patient began to recover. Ways to save money were identified and £2.8 million invested. Two years on Fairline's order books are much healthier - this Squadron 48 will soon be off to New York. Alistair Schofield is CEO - he took the helm last year. SOUNDBITE: Alistair Schofield, Chief Executive, Fairline Boats, saying (English): "The company did make very significant losses over that period of time. No business is sustainable at that sort of level so that's why we were very pleased last year that we were able to turn around quite a long trend of significant losses into a profit in 2012." Fairline has shed almost half it's workforce since the financial crisis first hit and the boat making market has shrunk considerably. Many other sectors have suffered too. By the end of last year one in 10 British businesses were reportedly operating like "zombies" and they've heavily contributed to Europe's debt crisis. UK regulators say banks must get tougher. SOUNDBITE: David Steinberg, Partner, Clifford Chance, saying (English): "Being locked into these zombie situations is something which inhibits them from actually investing elsewhere in more growth related opportunities." SOUNDBITE: Alistair Schofield, Chief Executive, Fairline Boats, saying (English): "Clearly one of the big unknowns is the market. The market is relatively stable at the moment albeit it has declined in recent years and I think what we're focussed on is making sure the current levels of demand we have a healthy profitable business with a future." Fairline is still navigating choppy waters - further redundancies remain a possibility. But the business is very much alive and contributing to the local economy.

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'Zombie' danger in Europe

Wednesday, July 03, 2013 - 02:31