Europe’s “Zombies” Brace For Mass Extinction In 2019
by Tyler Durden
ZeroHedge.com
Tue, 03/06/2018
One especially sensitive topic that has gotten renewed prominence in financial circles in recent weeks, is the fate of “zombie” companies in a low yield world, where the yield is starting to rise uncomfortably fast.
It started last December, when the IMF published a blog discussing the “Walking Debt: China’s Zombies” (a topic we first covered in October 2015 in “More Than Half Of China’s Commodity Companies Can’t Pay The Interest On Their Debt”). Slamming China’s “zombies”, the IMF said they “are non-viable firms that are adding to the country’s rising corporate debt problem, and are bad business. Zombie firms are highly indebted and incur persistent losses, but continue to operate with the support of local governments or soft loans by banks—adding very little value to economic prospects.”
Then, last week, as part of Deutsche Bank’s series on the impact of rising rates in a low rate world, Jim Reid also looked at “The persistence of zombie firms in a low yield world” which looked at the productivity and deflationary impact from keeping undead companies operating way beyond their expiration date.
If the survival of zombie firms is a drag on productivity growth, then one would expect to see further evidence of falling business dynamism. That can be seen in the decline in the share of young firms in the economy, halving to 8 per cent of all US firms since late 1970s. If bankruptcies represent an essential process of capitalism’s creative destruction, that too has slowed, and are now the lowest they’ve been since at least 1980 in the US.
Today, completing the “zombie trifecta” is Bank of America’s Barnaby Martin who looks at a day in the life of quasi-insolvent companies one year ahead, in a world in which the ECB’s bond buying is a thing of the past:
Although some months away, 2019 will be the first time in four years that European markets will have to manage without the helping hand of ECB asset buying. And Chart 8 highlights the immediate challenge for markets in this new era. The total amount of fixed-income redemptions in Europe (sovereigns +IG credit + HY credit) will jump by 20% next year to €1.1tr. Private investors will likely have to swallow a lot more bonds next year.
The Rest…HERE
