If the Fed Saved the Day, Why Is There a Fear of ‘Zombies’?

It might be the most successful central bank intervention in history: Without doing much more than issuing a press release, the U.S. Federal Reserve turned a pandemic-driven credit crisis into a record-breaking flood of lending. So why are so many investors worried? Some fear that the Fed has merely traded a liquidity crisis now for a solvency crisis later. Others think that the new debt boom, layered on top of a decade of hefty Fed-fueled borrowing, will produce so-called zombies -- firms surviving on endless debt that are lifeless when it comes to economic growth.

For corporate borrowers, liquidity means the ability to find the cash needed to pay debts, either out of their own revenue stream or in the credit markets. Solvency means not having debts that are too big to repay. Companies can go under if they lack either one. Borrowing new money to pay off old debts because you’re short of cash is how liquidity problems can become solvency problems.