E The Pandemic And Zombie Companies

“Bankruptcies fell 40 percent last year in France and Britain, and were down 25 percent on average in the European Union. Without government intervention, including billions in state-backed loans and subsidized payrolls, European business failures would have almost doubled last year, according to a study by the National Bureau of Economic Research, a private American organization.” (NYT, Jan 25, 2021)

“In the 1980s, only 2 percent of publicly-traded companies in the U.S. were considered ‘zombies,’ a term used by the Bank for International Settlements (BIS) for companies that, over the previous three years, had not earned enough profit to make even the interest payments on their debt.… The zombie minority started to grow rapidly in the early 2000s, and by the eve of the pandemic, accounted for 19 percent of U.S.-listed companies. It’s happening in Europe, China, and Japan, too.” (Tom Friedman, NYT, Jan 26, 2021)

“Governments face the difficult task of balancing near-term risks of premature austerity with a medium-term need to curb debt expansion…. Defaults will continue to rise. Even though we expect very low funding costs through 2021, higher leverage and a large share of vulnerable corporates are likely to induce further defaults, resulting in the 12-month speculative-grade default rate rising to around 9% in the U.S. and 8% in Europe by September 2021, versus 6.3% and 4.3% in September 2020.” (David C. Tesher, Feb. 3, 2021)

As government's withdraw their stimulus measures, will there be a surge of business defaults? What would schumpeter think about a new wave of zombie companies?

There are differences of opinion among economists as to how they expect the pandemic recession to end. This writer is part of pessimistic camp that believes that there will be longer-term serious consequences resulting from the pandemic recession. My worry is grounded on the possibility of a very unsatisfactory outcome.

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William K. 3 weeks ago Member's comment

It seems that a fair portion of the problem can be laid at the feet of the federal reserve bank and it's policies and actions. Certainly the very low interest rate on both savings and debt is a fair part of the reason that efficiency and cost-effectiveness have not been held as important. It does appear that all of the efforts on the part of the fed have been intended to protect the stock market and that 1% crowd, without much regard for anyone else. It certainly seems that this needs to change, and unfortunately Superman is AWOL at this time.

Unfortunately, I do not have a clear vision of the solution, or even the specific set of changes required.

What is clear is that greed has a high price, and that the payment is coming due, and that it will not be a happy time for quite a while. My hope is that the changes can be made without a lot of violence and destruction. That mob event at the capital was not the way to do it.