July 25, 2023

IMF: The Rise of the Walking Dead: Zombie Firms Around the World JUNE 2023

According to the International Monetary Fund’s (IMF) working paper “The Rise of the Walking Dead: Zombie Firms Around the World”, Italy has the most zombie companies in Europe in 2023, with an estimated 12.7% of all firms classified as zombies. This is followed by Greece (11.7%), Portugal (10.7%), and Spain (10.2%).

A zombie company is a firm that is financially insolvent but continues to operate because it has access to cheap debt. This can be a problem for the economy as zombie companies can crowd out more productive firms and prevent resources from being reallocated to more efficient uses.

The IMF’s working paper found that the prevalence of zombie companies in Europe has increased in recent years, and that this is likely due to a combination of factors, including the euro area sovereign debt crisis, the COVID-19 pandemic, and loose monetary policy.

The IMF paper also found that zombie companies can have a significant impact on economic growth. For example, the paper estimates that zombie companies in the euro area reduced economic growth by 0.2% to 0.4% per year between 2012 and 2019.

The IMF paper concludes by calling for policies to address the problem of zombie companies in Europe. These policies could include:

  • Raising interest rates to make it more expensive for zombie companies to borrow money.
  • Tightening lending standards to make it more difficult for zombie companies to obtain new loans.
  • Providing financial assistance to zombie companies to help them restructure their debts and become viable again.

It is important to note that the IMF’s working paper is just one study on the issue of zombie companies in Europe. More research is needed to fully understand the causes and consequences of zombie companies, and to develop effective policies to address the problem.

While the concerns about the companies called “zombies” whose income is insufficient to pay their debts spread all over the world, it was seen that Türkiye leads the way in the rate of zombie companies in this article published by the IMF.

  • The paper defines a zombie company as a firm that is financially insolvent but continues to operate because it has access to cheap debt. The paper uses a two-step definition to identify zombie firms:
    • First, the paper identifies firms that are financially insolvent by calculating their interest coverage ratio (ICR). The ICR is a measure of a firm’s ability to cover its interest payments with its operating profits. A firm is considered financially insolvent if its ICR is below 1.
    • Second, the paper identifies firms that have access to cheap debt by calculating their debt-to-equity ratio (DER). The DER is a measure of a firm’s leverage. A firm is considered to have access to cheap debt if its DER is above the median DER for firms in its sector.
  • The paper finds that the prevalence of zombie companies has increased in recent years in both advanced economies (AEs) and emerging markets (EMs). In the euro area, for example, the share of zombie firms increased from 5.5% in 2012 to 9.2% in 2019.
  • The paper finds that zombie companies can have a significant impact on economic growth. For example, the paper estimates that zombie companies in the euro area reduced economic growth by 0.2% to 0.4% per year between 2012 and 2019.
  • The paper concludes by calling for policies to address the problem of zombie companies in AEs and EMs. These policies could include:
    • Raising interest rates to make it more expensive for zombie companies to borrow money.
    • Tightening lending standards to make it more difficult for zombie companies to obtain new loans.
    • Providing financial assistance to zombie companies to help them restructure their debts and become viable again.

The paper also discusses the challenges of identifying and measuring zombie companies. These challenges include:

  • The lack of reliable data on firm financials.
  • The difficulty of distinguishing between zombie companies and firms that are temporarily struggling.
  • The possibility that zombie companies may be able to hide their financial problems from creditors.

Despite these challenges, the paper argues that it is important to identify and measure zombie companies in order to develop effective policies to address the problem.

For more info about the paper: file:///C:/Users/tercume/Desktop/wpiea2023125-print-pdf.pdf 

Source: IMF’s “The Rise of the Walking Dead: Zombie Firms Around the World” working paper – by Bruno Albuquerque and Roshan Iyer
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