September 23, 2018 / 4:16 PM / 3 months ago

Low interest rates spawn rise in number of zombie firms: BIS

LONDON (Reuters) - Decades of falling interest rates have led to a sharp increase in the number of “zombie” firms, a report for the Bank for International Settlements said, potentially threatening economic growth and preventing interest rates from rising.

The Netflix logo is seen on their office in Hollywood, Los Angeles, California, U.S. July 16, 2018. REUTERS/Lucy Nicholson

Economists generally define a zombie firm as one that is at least 10 years old but is unable to cover its debt servicing costs with its profits — a definition that would currently fit the likes of electric car maker Tesla (TSLA.O) and streaming giant Netflix (NFLX.O).

Lower borrowing costs should in theory reduce the number of zombie firms, which tend to be less productive than other companies, as their interest expenses are reduced.

But lower rates also ease the pressure on both the firms themselves and their creditors to clean up balance sheets, the report noted. Lenders then sometimes continue to provide ‘evergreen’ loans to firms that may not be able to pay them back.

“Should this effect be strong enough to reduce growth, it could even depress interest rates further,” the authors of the study in the BIS’ latest report found.

The study also included a narrower definition of a zombie firm, where future profitability was also expected to be low.

By both measures, it found the prevalence of such companies had increased significantly since the 1980s, and there had been a clear change in zombies’ behavior which coincided with interest rates beginning to fall.

Zombie firms took on more debt and disposed of fewer assets after 2000, a trend which continued after the financial crisis of 2008-2009 when the world’s major central banks effectively cut their rates to zero or even lower.

By the BIS’ estimates, the 10 percentage point decline in nominal interest rates since the mid-80s may account for around 17 percent of a six-fold rise in the number of zombie companies.

The zombie firms highlight a “difficult trade-off” for central bank policy, the BIS writers concluded. While lower rates should help boost aggregate demand in the economy and raise employment, more zombie companies means more misallocation of resources.

Their survival could also crowd out investment in, and employment at, healthy firms.

Zombie Army: reut.rs/2xA6Kfw

Reporting by Helen Reid; Editing by Kirsten Donovan

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