Home > Uncategorized > More thoughts on zombies

More thoughts on zombies

The issue of zombie companies has been across the financial pages in recent weeks including a high profile column piece from David Wighton in the Times

He has developed the theme suggested by Frances Coulson of R3. R3 suggest that the “zombies” are effectively or close to insolvency because they are only just managing to pay the interest on debt and are thus very vulnerable to an interest rate rise. Thats logical of course

The number of business insolvencies has been far less than expected and unemployment has not rocketed as predicted

Wighton goes on to say that the other side of the equation is that bank lending is restricted by this immovable exposure and is thus starved from new or growing enterprises.

Im going to counter both views a little

First of all, if rates rise it will be because the economy is recovering at a pace and it will be in reaction to the recovery rather than pre-empting it. By the same token, surely many of the businesses flatlining at the present time will benefit from the pick up. That would be a natural result of course

Wighton’s suggestion is a little more tenuous I believe. His premise is that by allowing more failing companies to go to the wall (or nudging them perhaps), the sector would cleanse itself of bad business. He draws parallels with Japan in the nineties whereby the issue of failing banks and businesses was not addressed until the damaging effects slowed down the economy

Maybe so, but can we be so sure that the banks would take risks on the new enterprises geared towards replacing the “zombies”? is the equation as straight line as suggested?Simple as that? Im not so sure. Also worth considering is that the resulting spike in unemployment would not aid the recovery cycle at all.

And are the banks as benign towards struggling businesses as has been suggested? I think it varies from bank to bank and the state backed lenders are supposedly more benign although the shareholders and employees of Peacocks may not agree

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