If Zombie Companies Don't Die, We'll Pay a Price
The U.S. needs a plan for putting them out of their misery once the Fed stops propping up the economy.
They’re literally everywhere.
Photographer: BRU GARCIA/AFPThe Federal Reserve is lending a lot of companies a lot of money. This week the central bank began buying individual corporate bonds, in addition to the bond exchange-traded funds it has bought already. Meanwhile, its Main Street Lending program has begun buying loans that banks make to small and medium-sized businesses at the Fed’s behest. These are in addition to a variety of other lending programs, all designed to keep corporate America afloat until the coronavirus pandemic passes. And there’s evidence that these programs are having the intended effect: there has been no large wave of commercial bankruptcies so far.
But there’s a growing worry in some quarters that all of this lending will create a wave of zombie companies. Zombies are businesses that have to borrow to survive and don’t make enough profit to cover debt-service costs. The number of such companies has been increasing steadily in developed nations during the past 20 years. The reason, presumably, is low interest rates, which allow zombies to sustain themselves on borrowed money rather than exit the market.