What’s to Be Done Now with All These Zombie Companies?

Saving the Zombies in Europe.

By Nick Corbishley, for WOLF STREET:

Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland.

Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period.

The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors:

  • Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years.
  • The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy.

A Bank of America report from July posits that the UK accounts for a staggering one third of all zombie companies in Europe. They represent 20% of all companies in the U.K, up four percentage points since March, according to a new paper by the conservative think tank Onward. In the two hardest-hit sectors — accommodation and food services, and arts, entertainment and recreation — the proportion of zombie firms has soared by 9 and 11 percentage points respectively, to 23% and 26%.

The number of zombie firms has shot up as companies have taken on huge volumes of fresh debt merely to weather the virus crisis while, in many cases, generating a lot less in revenues. Across the globe, non-investment grade companies issued $322 billion in the first eight months of this year — as much as in the whole of 2019, according to BIS data. At the same time, companies that were already zombies, instead of entering bankruptcy and having their debts restructured, have been bailed out by government and/or the central bank.

For their part, smaller companies have also taken on more bank loans, largely or completely backed by government. Many firms, particularly in the sectors most affected by the crisis, have lower revenues and weaker cash flow. As a result, the borrowed cash gets used up quickly but the debt remains. If they weren’t zombies before the Pandemic, they’ll be zombies going forward.

What is to be done with all these zombies? That’s the question many are now asking. The report by Onward proposes a cunning plan (in the Baldrick vein) — called New Start — that would convert any coronavirus debt that can’t be paid back into an income contingent loan collected as a share of trading profits. The debt would come due only when a company begins turning a profit.

“The New Start scheme gives the option to intelligently delay repayments only for those firms who need it,” says the study’s author Angus Groom. “This can be rolled out as a scheme managed by HM Treasury and implemented and controlled by banks — all the while maximizing taxpayer value for loans that the Government has already underwritten.”

The term “scheme” in British English in this context means “program,” but the USian meaning of “scheme” seems to be at least equally appropriate. And taxpayers will likely never see those funds again.

This is one of a number of proposals doing the rounds in Europe aimed at finding a way of keeping most, if not all, of Europe’s zombies upright, for as long as possible. They include a straight “state debt for equity” swap, which would essentially involve governments converting the emergency loans taken out by struggling companies into equity. This idea is particularly popular among senior bankers, such as Unicredit CEO Jean Paul Mustier, presumably because the unpayable coronavirus debt companies owe the banks would also be turned into equity.

“It is a win-win all around,” says City of London grandee Lord Leigh of Hurley: “Taking equity stakes in borrower-SMEs would provide those businesses with interest-free liquidity, leaving their growth potential unimpeded, whilst correspondingly giving banks the opportunity to recoup more of the money they have committed in the medium to long term.”

Former UK Chancellor George Osborne has proposed another solution: just forgive all small business coronavirus debt. As with most of the proposals, the plan is couched in terms of exclusively saving small companies. If past is prologue, it’s the larger ones — the ones that owe the banks millions or billions — they’re most interested in saving.

“None of these options are ‘uncontroversial’ and each involves varying degrees of moral hazard, taxpayer loss and engineering complexity,” says Groom. “However our solemn conclusion is that some form of action is unavoidable.”

Up to now, many — though not all — of the short-term rescue interventions by governments or central banks can be justified in some way or another, particularly if they support the unemployed and unlock credit that had frozen up even for healthy companies. But it’s quite another thing when the short-term rescue efforts become a long-term reality that helps to engender more and more new zombies as well as make preexisting zombies even bigger.

There are plenty of reasons why filling the economy with ever larger numbers of zombie firms is not a good idea. For a start, zombie firms are less productive and crowd out investment in more productive firms. Researchers at the BIS found that each one percentage point increase in the prevalence of zombie firms means 0.25 percentage points slower employment growth and a 17% decline in the capital investment rate.

Allowing zombie firms to proliferate in order to protect banks from the consequences of their bad lending practices and investors from the consequences of their bad investment choices doesn’t just reward — and by extension, incentivize — bad actions and decisions; it stores up bigger problems for the future. By Nick Corbishley, for WOLF STREET.

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  69 comments for “What’s to Be Done Now with All These Zombie Companies?

  1. Paulo says:

    What a freaking mess.

    Let’s translate this article to a smaller venue. I live near a small village that exists solely because a large forestry company once needed a community to house workers. It used to be called the ‘Townsite’. Other folks (like myself) live away, and ‘up the Valley’. About 20 years ago ‘The Company’ was in difficulty and was bought out. Now imagine the mayhem if local Govt, funded by the ‘Company’, forced residents to contribute money to keep it going as a zombie, stumbling forward but not really alive.

    What happened? ‘The Company’, was bought out by a US conglomerate called Weyerhauser. Weyerhauser tried to operate in Canada like they do in the US, as a union-busting nightmare. The workers, enraged, made it their life mission to run Weyerhauser off Vancouver Island. They succeeded and now there is a new company, publicly traded, leaner and more efficient, but still employing a union workforce. The pay is good, work is steady, and forestry is now booming.

    All levels of government stayed away throughout the transition and did not interfere, whatsoever. Zombie gone, absorbed by an evil takeover artist, employees and contractors suffered and fought back, and the work resumed with a new company better suited to this economy.

    Of course banking and a service economy is not exactly real work and more of a scam in the first place. But still, put a stake through it already. If something needs doing, an entrepreneur or collective (company) will rise from the ashes and get it done. If it doesn’t need doing, then……
    Govt needs to stay out of business and vice versa. Govt should pay for needed services that are not suitable for profit making enterprises.

    • flashlight joe says:


      “Govt needs to stay out of business and vice versa. Govt should pay for needed services that are not suitable for profit making enterprises.”

      IMHO, govt should quit taxing jobs!

    • VintageVNvet says:

      Agree with you totally once again P!
      Only thing you left out is that we need to put a stake through the hearts of both the zombie companies and guv mint bureaucracies that do little or nothing, the hearts I say!!!
      And the sooner the better for all working folks, retired folks, and especially the younger folks who will otherwise be paying for the idiocy that is going on in biz, markets, and guv mints today.

    • Satya Mardelli says:

      That sounds like capitalism

    • California Bob says:

      “Govt needs to stay out of business and vice versa. Govt should pay for needed services that are not suitable for profit making enterprises.”

      Step 1: Hang all the lobbyists.

      I kid (sorta).

    • Zantetsu says:

      Banking when done appropriately is not a scam. Services when performed according to market demand are not scams either.

  2. michael earussi says:

    So using the same criteria how zombie companies do we have in the U.S.?

    • 2banana says:

      I have been looking for a list of American zombie companies for years.

      Despite a plethora of articles on the subject…no one will name names.

      I have put together my own list.

      Basically, companies that never made a profit, never will make a profit and need da cheap/easy money to survive.

      • Happy1 says:

        Every company that has to do with fracking, Tesla, We (don’t) Work, a few dozen tech unicorns in the IPO line, and probably a whole bunch of office REITs, hotels airlines, for starters.

    • California Bob says:

      Easiest way to do this: Start with ALL the companies, then eliminate the profitable/legit ones.

      • char says:

        A great accountant can let any company look profitable for a short period so profitability says nothing. It is better to look at sectors that are dying or in a phase of great change

    • Assume Tesla is a zombie corporation. They make EVs which reduce air pollution and conserve energy. None of the competing old technology auto makers using ICE engines are really interested in that (assume). The government has an implied interest in keeping Tesla going. As McLuhan says, no one (consumer) really wants anything, until that thing is made available. Musk says give me your deposit and I give you a car when they are ready. Doesn’t work. Government says the cars are too expensive, we need more rich people who will buy those cars. This is the way we always do it, from Covid vaccine to computers to race horses, profits are front loaded in order to pay investors for the risk. In this case investors got rich taking the risk, after government reduced the cost of servicing their debt. Now you head down to the Tesla showroom, and there is long wait for delivery, and no service plan, or plug-in infrastructure, and the public utility is surcharging you. The fascist economy gained control. The trains still do not run on time, we are going to war, and Uncle Sam doesn’t want zombies, he wants YOU.

      • Olli Singer says:

        “They (TESLA) make EVs which reduce air pollution and conserve energy.”

        Do you really believe that?
        Better do some reading on EV energy efficiency and eco balance. Seriously!

    • Douglas j Gray says:

      Theranos was a classic example of a zombie company; they never had a revenue stream based on a real working product; had to keep getting fresh capital and lying about their device.

      • char says:

        It is not a classic example zombie companies are more the in ten years time we will .be the same size company, not Theranos who would grow 10x-100x and lied BIG with “our product work”. zombies are more of the “We will increase our margin on the sale price by 5%.” The small lies type.

  3. Soggy Waffles says:

    The great Austrian economist Joseph Schumpeter asserted that recessions were necessary and ultimately good. This because sending poorly performing companies to the trash pile would free up resources for allocation to better performing entities.

    Both Europe and the USA need to allow recessions to happen. Painful as they may be, they are ultimately the most efficient way to a healthy economy. Get the politicians out of the way!

    • 2banana says:

      The problem is:

      The politicians that are in office when a recession happens get blamed for the recession (with rare exceptions)

      They then get voted out of office.

      All politicians want to get re-elected (with rare exceptions).

      So the easy button is…


    • historicus says:

      Exactly. Jim Grant said “That’s why they call them “corrections”. They separate the well capitalized from the poorly capitalized, leaving conditions over all in a better place.
      Central Bankers have halted the concepts of business cycles and corrections. They believe, as Hayek pointed out, they know better than the market. Their hubris is unbound. And so will be the damage they ultimately create.

    • raxadian says:

      What happens if a country never recovers from recession, is still a “ultimately good”?

      • Zantetsu says:

        raxadian, generally not possible with a country that is run by an honest government.

        • michael earussi says:

          And where is the planet this honest government resides on? Surely not this one (and don’t call me Shirley).

        • char says:

          Depends on the definition of recovers. If you mean stops shrinking and grow again than that happens always. If you mean economy is again bigger than it was before the recession than it can happen and is not dependent on an honest government. Sadly a honest leadership is not even a plus but a honest civil service is

      • Happy1 says:

        Can’t happen in a free economy.

        • michael earussi says:

          Is this the delusion hour? First with an honest government and now with a free economy?

          This country’s, as well as most (if not all) of the world’s economies, are basically twisted into so many pretzels that it makes the Gordian Knot look simple. And if anyone tries to unravel it the whole thing will just fall apart. We’re in a Brave New Economic World people and who knows how this ride is going to end.

  4. 2banana says:

    “It is a win-win all around,”

    As long as it is taxpayer’s monies.

    Kicking the can down the road…a worldly pastime.

    “Allowing zombie firms to proliferate in order to protect banks from the consequences of their bad lending practices and investors from the consequences of their bad investment choices doesn’t just reward — and by extension, incentivize — bad actions and decisions; it stores up bigger problems for the future.”

    • historicus says:

      Central Planners protect some at the expense of others.
      The unelected, by committee, suddenly in control of everything.
      And we thought the Communists were the threat.

  5. Xabier says:

    Gosh, how terribly strange, when, as we all know Europe has been stuffed full of fresh immigrants to boost demand and provide a (cheap) labour force to pay pensions for Europe’s decrepit population as well.

    What CAN have gone wrong?

    Excellent article, as ever, thank you; I hope life is not too dismal now in Barcelona.

  6. DR DOOM says:

    What to do? Keep printing. The Lagarde Euro money printer runs on high speed exquisite German bearings and is lyrical to the ear as it goes La,La, oui,oui, Brrrrrrrrrrrrrrrrrr………

    • Ruthless Gangbuster says:

      QE does nothing, just psychological manipulation, the day a Cent, Dollar or Pound of that QE money enters the economy they will get hyperinflation ina week, all they do now is buy bond & add it to bank reserves which can’t be withdrawn or used, it’s not even money in reality, all smoke & mirrors, if people really knew & were not so brainwashed they would get out of this market quiccker then you can say crash. QE did zero in 2008 till now, absoultly nothing, all it did is create an illusion things are better, that is why debt went through the roof, debt drove the fake recovery not QE.

      • Cashboy says:

        As long as all Central Banks continue printing in unison it can continue as long as Joe-public believes their currency is accepted to buy what they need.

        Nobody is threatening the US Dollar so that will remain the reserve currency and the last to fall.

        • michael earussi says:

          Too much money chasing too few goods–you can’t escape that reality.

      • CRV says:

        If all money equals debt, then QE = debt, so QE also drove the fake recovery as did all the other (almost free) debt

  7. Ruthless Gangbuster says:

    They never learn. truth is with deficits so high & debt parabolic they can’t save anyone or anything, the end is here like it or not, it’s all going down down down.

  8. Ruthless Gangbuster says:

    Wolf, what would you say a single option taken by these gamblers is worth in leverage, 100 contracts, these gamblers with double leverage on Robinhood or 10 times leverage 1-10 using debt with other brokers, ya talking huge levegrage, if a broker has to purchase 100% of stock to hedge ya talking 100 contracts with a few dollars, then margin, it huge, what cn it be, I assume it could be 50x, 100x 500x plus leverage when using options, 1 option for Apple at 3@ premium, $300 cost and the other side buy 100 Apple stock, 50 Apple stock, to hedge. As an example some gambler could with very small amounts using options buy millions in stock at a time, then people wonder why markets are a bubble & why a crash of 90% can easily happen. Not sure if you can do ya magic and unravel this, would be very insightful. Now ya have millions of Lehmans & ever bigger leverage, ya average gambler in options is a Lehman Brothers now, then look at the fact Appe has easily 2 million call options a day, when ya look at Barchart most traded option, it’s truly unbelievable & no one is aware? Anyway would love you to unravel this with ya magic, Thank You.

    • Ruthless Gangbuster says:

      First 1.5 hours of trading, Apple 805k options 73,2% calls, so 590k call options, Apple up just 1.5%, without this gambling the market is gonna crash hard, 590k x 100 that’s 59 million stock, then with leverage only a small amount of Dollars were spent to do this, it’s totally crazy leverage. if a person spent 10k, then doubled it on Robibinhood minimum 2x, that’s 20k, an option for a few weeks is $2 say, they buy 10k options, that’s 10k of Apple option is 117 x 10k = 1.7 million in stock just with 2 times leverage + 10k cash, some do 10 times, now imagine how many do it in Apple, Amazon, Microsoft, Facebook & even worthless Tesla, this is gonna be one for the history books when they lose all thier money and hedges have to be liquidated cuz demnd for options evaporate. I do believe Trump & go are using these options, kind of strange that as soon as he was in this stock market has had miraculous bounce banks like never in history, Dec 2018, Feb 2020. When this blows in their faces though, it’s gonna be a blood bath.

  9. Bobber says:

    Well, if you eliminate the zombies you increase unemployment, and then taxpayers wind up paying people to do nothing. It’s more cost-effective to keep a zombie alive. But that is no long-term solution.

    It makes sense to kill zombies during a period when its employees can find better work to do. Governments can create this hiring climate by breaking up too big to fail entities and increasing realistic opportunities for competition. Or, better yet, break up the zombies into smaller entities and let investors take a haircut on the debt in order to move economies forward.

    Lax anti-trust policies and support for TBTF entities around the world is killing jobs, the middle class, and our economies.

    • Wolf Richter says:


      You don’t “kill” zombie companies. You restructure their debts in bankruptcy court, with some creditors getting the companies, and old shareholders and some creditors getting wiped out. They got paid to take that risk. The company then goes on with a much lighter debt load and can grow again. If the company has a good business model, bankruptcy can be a great thing (except for legacy investors).

      If the company doesn’t have a good business model — such as a brick-and-mortar department store — it needs to be liquidated anyway, rather than being endlessly propped up.

      That said, old management that caused the company to take on too much debt and caused it to fail needs to be thrown out in bankruptcy court and their prior bonuses need to be clawed back, but that’s precisely what’s not happening.

      • Brant Lee says:

        That’s the bottom line, Wolf, if boards of directors, management, CEO’s, keep making their salaries and bonuses and can still borrow to keep their loser company afloat(with no consequences), why not ride that pony as long as possible? Isn’t that what’s happening?

      • Bobber says:

        I’m an advocate of market-based debt restructurings, but I also support breaking up or capping growth of any company that has excess market share in any horizontal or vertical, unless pricing is regulated.

        • Wolf Richter says:


          Yes, me too. For example, I think big G needs to be broken up. I have to deal with it, and it’s involved in so many things that i cannot get around it. It has put itself in the middle of the Internet and controls that space.

        • MCH says:

          How dare you… trying to break up Don’t Be Evil. What are you? evil?


      • Lisa_Hooker says:

        Another thing bankruptcies do for the company is mark down (eliminate?) the liabilities to pensioners that worked for the company for 25 years and retired 5 years ago. This enables unwitting pensioners to go through bankruptcy too, just as if they had assumed risk like stockholders and bondholders. This is not sarcasm.

      • char says:

        They don’t need to be endlessly be propped up but until covid crisis is gone. I have the feeling that some people don’t understand that the covid crisis is only temporary but if you close companies now that you increase the crisis, and not by a little

  10. raxadian says:

    “The debt would come due only when a company begins turning a profit.”

    So what happens if the companies, just like certain popular Hollywood movies, never ends turning a profit?

  11. Jdog says:

    You would not have zombie firms if you did not have socialist, fascist, relationships between corporate entities and government. Socialism kills productivity, and competition, and eventually destroys the entire economic system. The one constant in all socialist systems is the “pretend” aspect.
    Like the old soviet joke about workers pretending to work, and the government pretending to pay them. In our system the zombie firms pretend to be productive, and cook their books to have pretend profits, and value. The problem with pretending is at some point it comes face to face with reality.
    America is not failing because of capitalism, it is failing because we have socialism, pretending to be capitalism….

    • VintageVNvet says:

      +1000 jpup!!!

    • Lisa_Hooker says:

      Jdog I get your drift. But it’s not really socialism as there’s too few folks involved. We have some form of oligarchy; a plutocracy, partially a kleptocracy, perhaps even a synarchy. Our owners are not really mindful of us. The old socialisms at least did lip service.

    • GotCollateral says:

      Yet this will go over peoples heads…

    • michael earussi says:

      It’s not socialist or Fascist. Call it what it is–Corruption, which regardless of what label you put on it destroys everything it touches.

    • char says:

      It is more a banking problem than a state problem and as such the color or style of government is not that important. You get it when the real rate of lending is low for a company. And high real rates are so much worse that they are not a real solution

  12. Engin-ear says:

    The question of the article is a quite rhetoric one because it’s hard to imagine a true (inter)national referendum on this topic in any close future.

    A better question is whether zomby activity became systemic and will take down our civilization if zombies are left without daily portion of warm fresh meat.

  13. TimTim says:

    Perhaps it would be better for us to go through the deleveraging pain, clear out the zombie comanies and look to a more sustainable future 2025 onwards.

    But that’s not going to happen. It’s sooo not going to happen.

    • Bet says:

      Of course it won’t happen. Americans in shared sacrifice for the greater good? Near term pain? Hell we can’t all agree on wearing a mask.

      • michael earussi says:

        You mean poor Americans in “shared” pain. The rich won’t feel a thing.

  14. Jimny says:

    Guess Marx was right. We started out as capitalists but evolved international socialists given enough time. Because I don’t know what else to call it when the government has either large scale equity positions in private firms for the social good (ie to prevent layoffs) and/or routinely bails out private firms through forgiveable loans during bad times. The only question is during good times whether profits go to labor or capital/management, which is a policy question that the government decides since they hold the leverage during bad times.

  15. Halsey Taylor says:

    “…income contingent loan collected as a share of trading profits”

    A dividend? That’s crazy talk.

  16. Rowen says:

    I always wonder about a zombie country like Italy. Depopulating even with a positive net migration.

  17. Michael Engel says:

    1) Zombie Tesla had a hot sunny day. Higher volume on half size bar.
    2) AAPL is black : today open was > today close, today close
    was > yesterday close.
    3) FB, GOOGL & AMZN are flat. Somebody put his knee on their neck.
    4) SPY : double black slalom, on falling volume, with air bubbles in between.
    5) IWM : above Mar 9(H) & June 8(H), under Aug 21(L) swing point !!
    9/11 spring produced a black upthrust.
    6) Black candles do matter.

  18. Stephen C says:

    Nick, I really enjoy your writing, sprinkled with just the right amount of understated humor.

    Gotta love this guy, though. “It’s a win-win all around, says City of London grandee Lord Leigh of Hurley . . .

  19. Chillbro says:

    It’s time that we all pitched in to share the losses! It would be too unfair if investor class had to suffer any losses. Who is going to create jobs and take profits next round!?

    • michael earussi says:

      Unfortunately, all too many of those “investors” are involuntary investors. A good friend’s pension was reduced by 30% a few years ago from the mismanagement of his retirement fund.

  20. Weninger Bernhard says:

    Karl Marx is having the last lough. All these “schemes” ultimately make the economy state owned. Communism and Plan Economy here W e come. How it ended we saw with the fall and implosion of Communism and the shear poverty it wreaked on the populations under it. Lest one forgets, already 20% of personal income in the US apparently comes from the State. 29 or so million Americans live on government money. And the show had only just begun.

  21. char says:

    German population is around 80 million so 550.000 companies are a) mostly owner operated without personnel or b) mostly a tax entity. In either case it is not the typical company described as zombie company

  22. Ron B. Liebermann says:

    “What is to be done with all these zombies? That’s the question many are now asking. The report by Onward proposes a cunning plan (in the Baldrick vein) — called New Start — that would convert any coronavirus debt that can’t be paid back into an income contingent loan collected as a share of trading profits. The debt would come due only when a company begins turning a profit.”

    “The New Start scheme gives the option to intelligently delay repayments only for those firms who need it,” says the study’s author Angus Groom. “This can be rolled out as a scheme managed by HM Treasury and implemented and controlled by banks — all the while maximizing taxpayer value for loans that the Government has already underwritten.”

    Allowing governments to take an ownership position in failed companies is the worst possible thing which could happen. Governments are full of chatty girls, who studied political science at Oxford. They couldn’t run a McDonald’s. Now we are supposed to put them in charge of the world economy? Governments are not run by responsible people. They are run by freeloaders who are never held responsible for any outcome. So it won’t matter if all those Zombie companies continue to fail, because Government actions, by definition, are immune from failure.

    The only real answer is to close most government departments in order to reduce the tax burden as much as possible. After that, the free market will sort things out.

    Prime Minister’s Office, 10 Downing Street

    Attorney General’s Office
    Cabinet Office
    Department for Business, Energy & Industrial Strategy (Closed)
    Department for Digital, Culture, Media & Sport (Closed)
    Department for Education (Closed)
    Department for Environment Food & Rural Affairs (Closed)
    Department for International Trade
    Department for Transport
    Department for Work & Pensions
    Department of Health & Social Care (Closed)
    Foreign, Commonwealth & Development Office (Closed)
    HM Treasury
    Ministry of Housing, Communities & Local Government
    Ministry of Justice
    Northern Ireland Office (Closed)
    Office of the Advocate General for Scotland (Closed)
    Office of the Leader of the House of Commons (Closed)
    Office of the Leader of the House of Lords (Closed)
    Office of the Secretary of State for Scotland (Closed)
    Office of the Secretary of State for Wales Swyddfa Ysgrifennydd Gwladol Cymru (Closed)
    UK Export Finance (Closed)

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