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January 8, 2013 7:29 pm
Zombie companies are always filed on the “nightmare” shelf in public policy, as authorities struggle to calibrate the right level of corporate liquidation.
Set policy – particularly interest rates – too loose and you will keep alive companies that should go bust or be restructured to use resources more efficiently. But set policy too tight and you will kill companies that are temporarily in trouble, exacerbating a downturn and destroying valuable economic resources.
Similar considerations apply to banks. Good forbearance props up a company in tough times, allowing it to recover and repay in better days. Bad forbearance keeps a company struggling on in a bid to prevent the bank accepting it will make losses.
During the crisis, the authorities have been more concerned that policy has not been sufficiently loose rather than it has been too tight.
Spencer Dale, the Bank of England’s chief economist, takes umbrage at the suggestion that the low level of corporate bankruptcy is a problem even though the proportion of lossmaking companies has risen sharply. “The whole point of monetary loosening at the moment [is] to keep companies who have a viable long-term future in business while demand is temporarily weak ... So I don’t think we should see this as particularly alarming,” he says.
Likewise, the International Monetary Fund’s big concern in its October global financial stability report was that capital flight from the periphery of the eurozone would push banks to sell off loans cheaply and could generate “very strong headwinds for the corporate sector”.
This general stance does not imply that policy makers are sanguine about the possibility that zombie companies are impeding recovery. In particular, they are concerned that banks are not fully disclosing non-performing loans, much as Japan failed to recognise bad forbearance sufficiently until 2002.
Authorities are also beginning to act. The IMF called on countries to take further steps to complete the cleaning up of banking balance sheets.
They do not mind banks continuing to be lenient with their loans, so long as they make sizeable provisions for the increasing probability that they will not see all of their money again.
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