Connect with us

Top Stories

Euro zone inadvertently supported zombie firms, ECB finds

Euro zone inadvertently supported zombie firms, ECB finds

FRANKFURT (Reuters) – Euro zone policies aimed at keeping the economy afloat during the pandemic inadvertently supported unviable or “zombie” firms and more targeted support is needed, especially as subsidies are phased out, a European Central Bank study concluded on Tuesday.

Zombie firms, kept alive by the availability of ultra-cheap credit, drag on economic growth as they take funding away from viable companies, fail to produce efficiency gains and endanger banks’ balance sheets.

“The economic impact of the pandemic and the policy response may have, at least temporarily, contributed to some degree of zombification,” the ECB said in a Financial Stability Review article.

“Zombie firms are likely to have accessed euro area government-guaranteed loan schemes and moratoria, given their broad eligibility criteria,” the ECB said, adding that a company’s fundamental credit characteristics have had little impact on its cost of funding.

While the actual benefits zombie firms enjoyed are likely to have been modest, support for them needs to be clawed back to prevent a broader threat to financial stability, the ECB added.

“The existence of a sizeable cohort of firms with zombie characteristics may lead to sell-offs, large-scale downgrades or catch-up defaults,” the ECB added.

(Reporting by Balazs Koranyi; Editing by Catherine Evans)

Editorial & Advertiser disclosure
Our website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.
Global Banking and Finance Review Awards Nominations 2022
2022 Awards now open. Click Here to Nominate

Advertisement

Newsletters with Secrets & Analysis. Subscribe Now