Low interest rates lead to an increase in the number of zombie companies: BIS

LONDON (Reuters) – Decades of falling interest rates have led to a sharp rise in the number of "zombie" companies, according to a report by the Bank for International Settlements, which could threaten economic growth and prevent rising rates interest.

Economists generally define a zombie business as being at least 10 years old but can not cover its debt servicing costs with its profits – a definition that would currently fit the Tesla electric car manufacturers (TSLA.O) and the streaming giant Netflix (NFLX.O).

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

However, the report notes that lowering rates also reduces the pressure on the companies themselves and their creditors. Lenders sometimes continue to provide "perpetual" loans to businesses that may not be able to repay them.

"If this effect were strong enough to reduce growth, it could even depress interest rates further," the study authors found in the BIS report.

The study also included a narrower definition of a zombie company, where future profitability should also be low.

Both measures showed that the prevalence of these companies had increased significantly since the 1980s and that the behavior of zombies had changed significantly, which coincided with the fall in interest rates.

Zombie companies incurred increased debt and reduced their assets after 2000, a trend that continued after the 2008-2009 financial crisis when the world's major central banks reduced their rates to zero or lower.

According to BIS estimates, the decline in nominal interest rates by 10 percentage points since the mid-1980s could represent about 17% of the six-fold increase in the number of zombie companies.

The authors of BIS concluded that zombie firms emphasize a "difficult compromise" for central bank policy. While lowering rates should help stimulate aggregate demand in the economy and increase employment, more zombie companies imply a misallocation of resources.

Their survival could also exclude investment and employment in healthy businesses.

Zombie Army: reut.rs/2xA6Kfw