In the U.S., 516 publicly listed firms have filed for bankruptcy from January by September 2023. Many of those firms have survived for a number of years with surging debt and lagging gross sales.
“The share of zombie firms has been growing over time,” mentioned Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental results on wholesome firms who compete in the similar sector.”
Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they will flip their development of sinking gross sales round.
“A very wholesome, well-capitalized banking system and monetary sector is one in all the most necessary elements in guaranteeing that unhealthy firms are wound down in a well timed means moderately than being propped up,” mentioned Kathryn Judge, a professor of regulation at Columbia University.
Economists say that zombie firms might grow to be extra prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures had been applied. The Fed says banks are refusing to hold weak firms in enterprise with favorable extensions of credit score.
The Fed economists level to wholesome stability sheets at U.S. firms, regardless of the growing weight of rate of interest hikes. The efficient federal funds charge was 5.33% in October 2023, up from 0.08% in October 2021.
“The largest implication of the fast rise in curiosity rates that we have seen the final 5 or 6 quarters, really, is that it reestablished money,” mentioned Lotfi Karoui, chief credit score strategist at Goldman Sachs. “That really places some constraints on threat belongings.”
The Fed says it thinks curiosity rates will stay higher for longer. “Given the quick tempo of tightening, there should be significant tightening in the pipeline,” Fed Chair Jerome Powell mentioned at an Economic Club of New York speech Oct. 19.
Watch the video above to be taught extra about the Fed’s battle with unviable zombie firms in the U.S.