This Just In ...
According to studies by Swiss Re AG, the effect of hundreds of “zombie companies” failing over the next few years and becoming a drag on the economy is playing a role in decision making by insurers to reduce risk and charge higher premiums — a trend likely to continue as failures increase.
Zombies — which lack the cash flow to cover the cost of their debt — are “a ticking time bomb” whose explosive effects will be felt as governments and central banks withdraw measures that have helped keep these companies alive during the pandemic, Jerome Haegeli, chief economist at the Swiss insurer, told Reuters.
These Zombie companies are a potential burden for the financial sector, especially when it comes to increased credit default rates. Low interest rates incentivize companies to take up bank credit, creating a risk of large-scale defaults on these loans once government support dries up and the zombie companies become insolvent. The Institute of International Finance reported that bank loans to small-and-medium enterprises in the US rose by 6% in 2020.
To avoid a potential surge of defaults and bankruptcies, governments will need to carefully decide how and when to withdraw stimulus packages. According to the Swiss Re study, to assure a sustainable economic recovery, government policy should support businesses that are viable in the long run and facilitate the orderly restructuring of non-viable firms.
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