Zombie companies – sustained by COVID-19 support

Government financial relief programmes have been enacted during the COVID-19 crisis to prevent corporate bankruptcies. Credit subsidies have protected companies from COVID-19 related insolvency – that is both companies with a viable business model but also non-viable firms. The latter are often referred to as “zombie firms”, defined as companies “unable to cover debt servicing costs from current profits over an extended period.”1 This is not a new phenomenon. A 2018 working paper from the Bank for International Settlements (BIS) documents an increase in zombie firms since the late 1980s.

The various pandemic relief and support measures, while clearly necessary, have further exacerbated the issue and thus again brought the topic to the forefront. Two pieces of evidence are worth considering. First, according to data from S&P, the global default rates in 2020 were lower than in past recent crises and are expected to remain below peak levels, highlighting the effects of the measures taken.2 And second, according to the Institute of International Finance, non-financial corporate debt in the US has risen from under 75% in autumn 2019 to over 90% in spring 2020, while bank loans to small-and-medium enterprises (SMEs) rose by 6%.3 In the words of the report: “Low interest rates have enabled these fragile businesses to accumulate more debt, thus increasing the risks that more of these unprofitable businesses become “zombie” firms”, particularly those non-listed SMEs that are heavily reliant on bank loans as their main financing avenue.4

As such, while the financial support has been necessary and successful in dampening the adverse effects of the current crisis (such as higher long-term unemployment), it also comes with longer-term structural risks: one notably linked to financial markets, and others to economic consequences.

Regarding potential financial market implications, zombie companies may simply not be able to pay back their loans, leading to a notable rise in non-performing loans. And so in the long-term, once emergency fiscal measures start being lifted, rising interest rates could impact the refinancing costs, and thus profitability, of zombie SMEs. This could in turn have negative balance sheet implications for those banks highly exposed to non-performing loans. And on the second point, regarding potential economic consequences, the BIS study found that zombie companies are less productive, hence lowering a country’s aggregate productivity as it impedes “creative destruction”. Also, some research suggests that helping distressed firms to stay alive, while socially justifiable in many regards such as to avoid acute spikes in unemployment, also creates excess production capacity and thereby disinflationary pressures.

The key question for policymakers is when and how to scale back support. For insurers, the zombification of companies introduces new challenges in deciding which firms are insurable risks.


1 R. Banerjee and B. Hofmann, “The rise of zombie firms: causes and consequences”, BIS Quarterly Review, September 2018, 67-78.
 2 S&P Global Ratings, “2020 Annual Global Corporate Default And Rating Transition Study”, 7 April 2021.
3 E. Tiftik, P. Della Guardia, “IIF Weekly Insight: Zombies Inc”, Institute of International Finance, 1 October 2020, https://www.iif.com/Portals/0/Files/
4Ibid., p. 2


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