The Impact of Cheap Money on the Growth of Zombie Companies

In the years following the 2008 financial crisis, central banks around the world slashed interest rates to stimulate economic growth. This policy of "cheap money" — low borrowing costs — has been a key tool in keeping the global economy afloat. However, while cheap money has helped businesses grow and thrive in many sectors, it has also contributed to the rise of "zombie companies." These are firms that are able to survive, but only because they can borrow at extremely low rates, rather than through strong profits or healthy business models. The persistence of these companies raises important questions about their long-term impact on economic growth, innovation, and market health.

What Are Zombie Companies?

Zombie companies are firms that are financially weak, typically having little ability to generate profit, and struggle to cover their debt obligations. Despite this, they manage to stay afloat due to low-interest rates and the easy availability of credit. Essentially, these companies are kept alive by cheap borrowing rather than the fundamentals of a strong business model.

They often have trouble paying off their debt or investing in innovation, and instead, they continue to rely on refinancing to stay operational. While they may not technically fail, their survival is at the expense of healthier, more competitive businesses.

The Role of Cheap Money in the Rise of Zombie Companies

The period of ultra-low interest rates, especially after the 2008 financial crisis and the COVID-19 pandemic, has created an environment where borrowing has been more accessible and affordable than ever before. For many companies, this cheap credit was a lifeline, allowing them to survive in an environment where economic growth was sluggish, or their business models were outdated.

However, it has also allowed zombie companies to continue operating. These businesses are often propped up by low borrowing costs, but their lack of profitability means they are highly vulnerable when interest rates begin to rise or economic conditions worsen. The longer these companies are allowed to survive, the more resources they consume, which could otherwise go to more innovative, productive firms.

The Negative Impact on Innovation

Zombie companies can be a significant drain on innovation. Instead of allowing capital and resources to flow into dynamic companies that are creating new products, services, and ideas, cheap money allows failing companies to survive longer than they should. This diverts attention and investment from businesses that could be growing and pushing the economy forward.

The resources that would typically be invested in research and development, new technologies, or expanding operations in innovative ways are often wasted on these financially weak companies. As a result, the economy may miss out on opportunities for genuine growth, technological advancement, and job creation that would be more likely if these companies were allowed to fail or restructure.

Distortion of Market Competition

When zombie companies continue to survive, they distort competition. Instead of being forced out of the market by better-performing competitors, they can continue to exist through access to cheap money, maintaining their market share despite underperforming. This unfair advantage can prevent healthier companies from growing and gaining market dominance.

Additionally, zombie companies can influence pricing, as they often compete by underpricing their products or services to maintain cash flow, even if it means operating at a loss. This creates a false sense of competition in the market, which can discourage other businesses from entering or investing in sectors where they might otherwise thrive.

Financial and Economic Vulnerabilities

Zombie companies can also contribute to financial instability. As long as they are able to refinance their debt, they appear to be functioning businesses. However, these companies are often heavily reliant on low-interest rates to stay afloat. When interest rates rise — as they eventually must — these companies will struggle to meet their obligations. This can trigger defaults, layoffs, and potentially wider economic instability.

From a broader economic perspective, the survival of zombie companies weakens the overall financial health of a nation or region. The presence of these companies indicates inefficiencies in the economy. Instead of resources being allocated to productive, value-creating firms, they are being funneled into businesses that are merely surviving. This can lead to slower overall growth, lower productivity, and potentially even financial crises if the zombie companies’ debts are too large or widespread.

The Risk of a Debt-Laden Economy

Zombie companies are typically burdened with high levels of debt, which they can only service due to low borrowing costs. If these companies begin to fail or face increased borrowing costs, the cascading effect could be felt across the economy. Banks, creditors, and investors who have lent money to these companies could suffer losses, causing a ripple effect through financial markets.

This also creates a situation where more and more businesses become addicted to cheap credit. As debt piles up, the economy as a whole becomes more vulnerable to external shocks, such as changes in interest rates, geopolitical instability, or another financial crisis. The economy becomes less resilient, and its growth potential is stunted by the weight of unsustainable corporate debt.

Should Zombie Companies Be Allowed to Survive?

The rise of zombie companies poses a tough question: should governments and central banks intervene to keep struggling businesses alive, or should market forces be allowed to decide which companies survive? While some argue that zombie companies provide jobs and prevent immediate economic shocks, the long-term effects of sustaining these businesses can be harmful to the broader economy.

Many economists argue that allowing these companies to fail and free up resources could lead to stronger economic growth in the long run. When businesses that are inefficient or no longer viable are allowed to fail, it can lead to a reallocation of resources to more productive and innovative sectors, ultimately benefiting the economy as a whole. This process, known as "creative destruction," is a fundamental aspect of capitalism.

Conclusion

Cheap money has undoubtedly played an important role in supporting economic growth and stability, especially in times of crisis. However, its unintended consequence has been the rise of zombie companies — businesses that survive not because of their success but because of their access to cheap credit. These companies can distort markets, stifle innovation, and introduce economic risks by carrying excessive debt.

While it's difficult to predict the future impact of zombie companies, it's clear that as interest rates begin to rise, the long-term sustainability of these businesses will be tested. It will be crucial for policymakers, businesses, and investors to be aware of the risks posed by zombie companies and consider how to address them as part of a broader strategy for sustainable economic growth.