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Ultralockere Geldpolitik: EZB, Fed & Co. schuld an Boom der

Too Loose Monetary Policy: The European Central Bank, the Federal Reserve and Their Partners Responsible for the Zombie Boom of Recent Years | 01/09/22

• Since 2008, central banks have followed a historically flexible policy monetary policy

• Rzońca and Parosa: Unprofitable companies have thrived for years thanks to the Federal Reserve

• Zombie companies offered profits to directors, creditors, and shareholders – but not to the general economy

The very loose monetary policy of recent years is likely to end at the present time in 2022. At the US central bank conference in Jackson Hole last Friday, Jerome Powell, Chairman of the US Federal Reserve, confirmed that further rate hikes are scheduled. While he warned of significant collateral damage to the US economy, he also made clear that the Fed is not considering stopping rate hikes prematurely. Inflation, which reached 8.5 percent in the United States in July, is a very big problem for the overall prosperity of the population. Devaluation of money must be stopped. More and more central bankers are now calling for a significant rate hike of 0.75 per cent for the next ECB decision. This shift has far-reaching consequences in the economic cycle and could threaten the very existence of individual firms.

What is a zombie company?

So-called “zombie” companies are likely to suffer severely from higher interest rates. These are those companies whose profits are less than the interest payments on loans previously obtained. Zombie companies can barely service their debts by taking out more loans, but they accumulate more debt interest in the process. In other words, the increased liabilities thus exceed profits, which leads to a negative cash flow. During a “conventional monetary policy” with an interest rate of two to three percent, it is very difficult for such a company to survive. However, in a very loose money environment, where you only have to pay marginal interest to get a loan, this business model can thrive. According to a US report, in 2021 – the year when global interest rates were mostly zero or even negative – 10% of US listed companies fit the definition of a zombie company. Well-known traditional companies such as Boeing are often included in this category.

This is why the boom in zombie companies can be explained by monetary policy

In a comment in the Financial Times, former Polish central banker Andrzej Rzońca and AXA asset manager Grzegorz Parosa also blamed international central banks on the Federal Reserve for the ominous boom in zombie companies. In the context of the shocking financial crisis of 2008, the governors of the Federal Reserve and the European Central Bank introduced “unconventional monetary policy”. This is characterized by low interest rates and large-scale asset purchase programmes. The result was a massive increase in demand, but central banks neglected the supply side. This, in turn, enabled the “zombies” of the economy, say Rzońca and Parosa.

Directors, creditors, shareholders – all temporary beneficiaries of zombie corporations

While the Fed cannot create zombie companies itself, “it can create an environment in which zombies are possible. When interest rates are at zero, creditors are encouraged to expand financing for non-producing companies.” The costs of this extension are very cheap thanks to the low credit costs. Also, in an environment with extremely low interest rates, investors were desperate for yield, so they bought the stocks and bonds of these zombie companies to keep them afloat. For highly profitable companies such as Microsoft, Johnson & Johnson or Coca-Cola, bond yields in a low interest rate environment were not attractive enough.

At the same time, zombie companies have little incentive to restructure, given that their business model can do very well in times of loose monetary policy. Rzońca and Parosa are sure that all groups involved – from the manager and other employees to the creditor and shareholder – benefit from the existence of the zombie corporation. Therefore, in her opinion, it is no coincidence that zombie companies in “Great Britain, Belgium, Spain, Greece, Portugal and Italy control more than 40 percent of all assets.”

Why unprofitable zombie companies are disrupting the economic cycle

In this sense, the loose monetary policy of the central banks has fueled speculative fever. The Fed, European Central Bank and Co. were aware of this, but saw it as less of a problem. The main driver was to stimulate demand. However, another problem has arisen with inflation: the supply and demand side has been seriously imbalanced for months, and rising energy prices are also driving up inflation. All this leads to huge increases in prices, especially for goods that are in high demand.

Here, according to Rzońca and Parosa, zombie companies play a fatal role: “Zombies are trolling assets and employees. They make life more difficult for startups and slow down innovation. In addition, their presence reduces profit margins, which makes investing in healthy competitors less attractive. . In professional circles, this is called “inefficient resource allocation”, which prevents old competition from being driven out by a new, more productive one.

Consequences of “zombification” of economies in Euro-zone serious. “In Europe, ultra-low interest rates – through undermining and resulting misallocation – lowered productivity and reduced GDP growth by up to 3 percent in the years following the financial crash. This further weakened already-sluggish European economies.” This is why Rzońca and Parosa conclude their comment to the Financial Times with an unmistakable call out to the Federal Reserve, the European Central Bank and other central banks around the world: “It is time for central banks to stop feeding zombies and go back to traditional politics.”

Given the highest inflation rate in four decades, you don’t have to be a prophet to expect that the demands of Polish economists are likely to be answered by Powell & Co. in the coming months.

Editorial office