Zombie Corporations: 10% of Companies Depend on Cheap Fed Money

Ten percent of corporations survive only because central banks have kept real interest rates negative.

The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

In simple terms, Zombies are those firms that could not survive without a flow of cheap financing.

The above chart shows the median share of zombie firms across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US.

According to the BIS Quarterly Report one out of ten corporations in emerging and advanced countries is a "Zombie".

Let's dive into the report for more details.

The inability to come to grips with the financial cycle has been a key reason for the unsatisfactory performance of the global economy and limited room for policy manoeuvre.

Since 2007, productivity growth has slowed in both advanced economies and EMEs. One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates.

Over the past 10 years, there has been a close positive correlation between the growth of corporate credit and investment. A build-up of corporate debt has financed investment in many economies, particularly in EMEs, including high investment rates in China. Turning financial cycles in these economies could therefore weigh on investment.

As with consumption, the level of debt can affect investment. Rising interest rates would push up debt service burdens in countries with high corporate debt.

Moreover, in EMEs with large shares of such debt in foreign currency, domestic currency depreciation could hurt investment. As mentioned before, an appreciation of funding currencies, mainly the US dollar, increases debt burdens where currency mismatches are present and tightens financial conditions (the exchange rate risktaking channel).

Empirical evidence suggests that a depreciation of EME currencies against the US dollar dampens investment significantly, offsetting to a large extent the positive impact of higher net exports.

End of the Rate Hike Cycle

For the above reasons, I believe the end of the global recovery is at hand.

And when the next bust happens, the last thing central banks will be doing is raising interest rates.

Mike "Mish" Shedlock

No. 1-18

@El_Ted0, exactly my thoughts. If growth happens, no inflation, interest rates normalised and stock markets still ATH everyday then we are the patsy and big ben is the winner. Never thought these guys would manage it but they have till date and some


The labor participation rate is under 63 percent and there are millions of Obamacare created part-time jobs,. There is plenty of room for growth in Jobs


The Labor market is at full capacity, the fundamentals, GDP and the GDP deflator, are so much legerdemain. The charts tell another story, that a rate hike crash is imminent. The fed is raising faster than inflation (still behind the curve) and while I believe raising rates fuels inflation most do not. If the Fed believed that raising rates dampens inflation they would stop immediately.


@aqualech , We emerged from the Great Recession, have been growing for 9 straight years and stocks have more than tripled since March 2009. I am among the naysayers who expected the economy to re-crater several times during the past 9 years and am still skeptical. However, at this moment in time, the economy IS humming. IF the economy remains at 3%+ growth AND interest rates normalize, there comes a time - if you are intellectually honest - to tip your cap to your opponents. The economy may collapse with slightly higher interest rates - the housing market in particular, in part due to tax reform - , but if it doesn't and you don't give the money-printers any credit, you are simply a fundamentalist and not an objective economist.


As "fear" capital from around the world continues to flow into stocks, what do you think the Fed is going to do?

US Stocks are constantly making new highs because RELATIVE to everything else they represent the best option for the big money that needs a market that can absorb their flows. If global capital thought the best place to park was in Europe, Japan or China, it wouldn't matter what the Fed does or how many buybacks there are, because investment flows swamp everything, including trade volume. Why do you keep ignoring this fact? Now that it looks like we will get a big decrease in the corporate tax, do you think the US will see more or less capital flows?

As corrupt and worthless as our politicians are, the rest of the world is even worse, and they are continuing to destroy their economies by finding new ways to confiscate money from their citizens instead of looking in the mirror and reforming. Europe failed to consolidate all their debts to have a true competitor to US treasuries, and Japan relied on nationalism to keep people from selling, which has also caused a demographic nightmare. Throw in the ease of Bitcoin to get the money out, and the US dollar will continue to rise even faster, which will accelerate the debt death spiral for all the foreign entities holding dollar-based debts.

If you haven't figured out the answer to my first question yet, you are as hopeless as the people that still think man causes the climate to change, Bitcoin is just a fad, or that socialism just needs one more chance. I'm sure there are many readers that do not have their heads buried in the sand, and can see what's coming.

Rates will rise with risks, and because the Fed does not want to be seen as a serial bubble blower, although that image was shattered long ago. However, since CB's and politicians never look in the mirror and admit a mistake, problems will get worse and all of these companies nursing on tits of CB's will implode, along with CB's and govt's, when no one will buy their debt at any rate.

Yes, stocks will retest support, which is still 10-15% higher, but make no mistake, the DOW will see 40,000 before the G5 cries uncle and re-jiggers the system one last time to save their perks and power. Of course, the more desperate govt becomes to get theirs, the worse the economy gets and the more the anti-establishment movements grow. I don't know how this ends, but it will get worse before it gets better, and it won't get better until short term-limits become reality.