Zombie company

Last updated

In political economy, a zombie company is a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal.

Contents

Description

Zombie companies are indebted businesses that, although generating cash, after covering running costs, and fixed costs (wages, rates, rent) only have enough funds to service the interest on their loans, but not the debt itself. [1] As such, they are generally dependent on the refinancing of maturing debt for their continued existence and may face solvency risks should interest rates rise or investors withdraw from further financing.

History

The term "zombie company" was applied to Japanese firms supported by Japanese banks during the period known as the "Lost Decade" after the collapse of the Japanese asset price bubble in c.1990. Japanese banks continued to support weak or failing firms. [2] The retailer Daiei is an example of a large company that expanded greatly during the period leading to the 1990 crash, and under different circumstances would have been expected to have entered receivership or bankruptcy. The finance minister, Takeo Hiranuma, was reported as describing the 96,000-employee firm as being 'too big to fail'. [2] [3]

The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program (TARP).[ citation needed ]

By 2016, following the economic downturn in China (see also 2015–16 Chinese stock market crash), Chinese industrial companies (steel, aluminum, paper, etc.) had developed gross overproduction capacity problems, with overcapacity rising from 0% in 2007 to an average of 13% by 2015, with figures higher than 30% in some industries (cement, steel in 2014). [4] At the 2016 National People's Congress, the country's government recognized the issue of the 'Zombie Enterprises' and announced that it was to close or reorganize many state-owned (public) industrial companies by 2020. [5] [6] In the coal and steel industries, the resultant loss of work was expected to result in 1.8 million redundancies (15% of the workforce), with total redundancies estimated to be up to 6 million workers. [7]

The term has also seen an increased amount of usage in 2022, with concern over a number of "zombies" possibly going bankrupt or needing to layoff workers due to a spike in interest rates. [8]

See also

Related Research Articles

In economics, a recession is a business cycle contraction that occurs when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster.

<span class="mw-page-title-main">Economy of Spain</span>

The economy of Spain is a highly developed social market economy. It’s the world's 15th largest by nominal GDP and the sixth-largest in Europe. Spain is a member of the European Union and the eurozone, as well as the Organization for Economic Co-operation and Development and the World Trade Organization. In 2021, Spain was the twentieth-largest exporter in the world and the sixteenth-largest importer. Spain is listed 27th in the United Nations Human Development Index and 37th in GDP per capita by the World Bank. Some of the main areas of economic activity are the automotive industry, medical technology, chemicals, shipbuilding, tourism and the textile industry.

An economic bubble is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth, and/or by the belief that intrinsic valuation is no longer relevant when making an investment. They have appeared in most asset classes, including equities, commodities, real estate, and even esoteric assets. Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles, are attributed to central banking liquidity.

<span class="mw-page-title-main">Debt</span> Obligation to pay borrowed money

Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.

<span class="mw-page-title-main">Loan</span> Lending of money

In finance, a loan is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.

<span class="mw-page-title-main">1997 Asian financial crisis</span> Financial crisis of many Asian countries during the second half of 1997

The 1997 Asian financial crisis was a period of financial crisis that gripped much of East and Southeast Asia during the late 1990s. The crisis began in Thailand in July 1997 before spreading to several other countries with a ripple effect, raising fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1999 was rapid, and worries of a meltdown quickly subsided.

A chaebol is a large industrial South Korean conglomerate run and controlled by an individual or family. A chaebol often consists of multiple diversified affiliates, controlled by a person or group. Several dozen large South Korean family-controlled corporate groups fall under this definition. The term first appeared in English text in 1972.

A zombie is traditionally an undead person in Haitian folklore, and is regularly encountered in fictional horror and fantasy themed works.

<span class="mw-page-title-main">Household debt</span> Combined debt of all people in a household

Household debt is the combined debt of all people in a household, including consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.

<span class="mw-page-title-main">Vulture fund</span> Fund that invests in distressed assets

A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to subsequently sell the debt for a larger amount than the purchasing price. Debtors include companies, countries, and individuals.

<span class="mw-page-title-main">Great Recession</span> Global economic decline from 2007 to 2009

The Great Recession was a period of marked general decline observed in national economies globally, i.e. a recession, that occurred from late 2007 to 2009. The scale and timing of the recession varied from country to country. At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression. One result was a serious disruption of normal international relations.

A zombie bank is a financial institution that has an economic net worth of less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support.

<span class="mw-page-title-main">Lost Decades</span> Period of economic stagnation in Japan

The Lost Decade was a period of economic stagnation in Japan caused by the asset price bubble's collapse in late 1991. The term originally referred to the 1990s, but the 2000s and the 2010s have been included by commentators as the phenomenon continued.

The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader 2007–2008 financial crisis.

<span class="mw-page-title-main">European debt crisis</span> Multi-year debt crisis in multiple EU countries since late 2009

The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, was a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).

<span class="mw-page-title-main">Steel industry in China</span> Overview of the steel industry of China

The steel industry in China has been driven by rapid modernisation of its economy, construction, infrastructure and manufacturing industries.

In the United States, the Great Recession was a severe financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output. This slow recovery was due in part to households and financial institutions paying off debts accumulated in the years preceding the crisis along with restrained government spending following initial stimulus efforts. It followed the bursting of the housing bubble, the housing market correction and subprime mortgage crisis.

<span class="mw-page-title-main">Debt crisis</span> Situation in which a government cannot pay back its debt

Debt crisis is a situation in which a government loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, the government may enter into a debt crisis. Various forms of governments finance their expenditures primarily by raising money through taxation. When tax revenues are insufficient, the government can make up the difference by issuing debt.

Debt-trap diplomacy is a term to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender's political leverage. The creditor country is said to extend excessive credit to a debtor country with the intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations. The conditions of the loans are often not publicized. The borrowed money commonly pays for contractors and materials sourced from the creditor country.

The corporate debt bubble is the large increase in corporate bonds, excluding that of financial institutions, following the financial crisis of 2007–08. Global corporate debt rose from 84% of gross world product in 2009 to 92% in 2019, or about $72 trillion. In the world's eight largest economies—the United States, China, Japan, the United Kingdom, France, Spain, Italy, and Germany—total corporate debt was about $51 trillion in 2019, compared to $34 trillion in 2009. Excluding debt held by financial institutions—which trade debt as mortgages, student loans, and other instruments—the debt owed by non-financial companies in early March 2020 was $13 trillion worldwide, of which about $9.6 trillion was in the U.S.

References

  1. "'Zombie' companies eating away at economic growth". BBC. 13 Nov 2012. Archived from the original on 12 November 2020. Retrieved 20 June 2018. "A zombie company is one which is generating just about enough cash to service its debt, so the bank is not obliged to pull the plug on the loan," (Mark Thomas, PA Consulting)
  2. 1 2 Denny, Charlotte (20 Nov 2002). "Japan's zombie economy – not buying but browsing". The Guardian. Archived from the original on 26 December 2019. Retrieved 13 December 2016.
  3. Brooke, James (October 29, 2002). "They're Alive! They're Alive! Not!; Japan Hesitates to Put an End to Its 'Zombie' Businesses". New York Times. Archived from the original on February 16, 2009. Retrieved September 19, 2017.
  4. "The march of the zombies". The Economist. 27 Feb 2016. Archived from the original on 1 December 2017. Retrieved 19 September 2017.
  5. "China to clean-up 'zombie' companies by 2020: Xinhua". Xinhua / Reuters. 17 Jan 2016. Archived from the original on 8 November 2020. Retrieved 3 July 2017.
  6. Tu, Lianting (8 Mar 2016). "China's Takeover Troubles Putting Xi's 'Zombie' Reforms to Test". Bloomberg. Archived from the original on 2019-12-26. Retrieved 2017-03-12. "We will address the issue of 'zombie enterprises' proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations," (Li Keqiang)
  7. Petricic, Sasa (3 Mar 2016). "Massive layoffs coming as China confronts its overbuilt 'zombie economy'". CBC News. Archived from the original on 8 November 2020. Retrieved 13 March 2016.
  8. "A huge number of 'Zombie' companies are drowning in debt. This CEO sees a reckoning as interest rates soar". Fortune. Retrieved 2022-12-15.