Zombies are stalking Europe — zombie banks that are solvent in name only. The phenomenon is not new. Zombies weighed down Japan for almost 20 years after a real estate bust. They are usually born of financial panics, when loans go bad, capital flees and the value of assets tumbles. There are no good choices when zombie banks are on the march. Shutting them down can cause further panic. Restoring them to health can require hundreds of billions of dollars. But letting them fester can cripple an economy for years, because zombies don’t make the loans healthy businesses need to grow and consumers need to spend. No place has been cozier for zombies since the 2008 global financial crisis than Europe, and no economy has taken longer to recover.
Europe has been slow and piecemeal in its approach to troubled banks. Lenders in Greece face the specter of their fourth cash infusion as the economy wobbles and deposits flow out. In Italy, repeated attempts to relieve banks of soured loans have failed to restore trust. On July 4, the Italian government injected 5.4 billion euros ($6.1 billion) and became the majority owner of the country's fourth-largest lender as part of its ongoing efforts to keep a zombie alive. The previous month, it provided 17 billion euros to make the acquisition of two failed banks by a larger rival possible. In contrast, Spain refused to provide any state funds when it killed off its own zombie with the forced sale of failing Banco Popular Espanol SA. Spain's earlier refusal to deal with its crippled banks helped fuel Europe's sovereign debt crisis between 2010 and 2012, along with ailing banks in Ireland and Portugal. Even after multiple rescues and capital injections, almost a fifth of 130 banks failed a European Central Bank stress test in 2014. In an effort to coordinate the response, the ECB was given the job of the central banking regulator. In October 2016, the International Monetary Fund said European banks with more than $8 trillion in assets were still so weak they remain vulnerable even if economic growth picks up.