The Zombie Effect…In Luxembourg & Beyond

Since the 2008 recession, we have witnessed the infiltration of seemingly benign economic creatures with a dark side...They limit domestic productivity and threaten to exacerbate a future economic downturn. They are the zombie firms.

Zombie firms can be defined as companies where turnover is static or falling, profitability is persistently low, margins are being squeezed, cash and working capital reserves are limited, leverage levels are high, and where there's a limited ability to invest in new equipment, products or processes.

The sharp rise in zombie firms in Europe over the past decade could be explained by the loose monetary policy environment, greater creditor forbearance by lenders, and government policies that fueled lending. Rather than cease trading, businesses have staggered on creating a notable drag on European productivity.

Using the 'wide' (where interest coverage ratio is less than one in the last three years and the company older than 10 years) or 'narrow' (where the company's Tobin's Q is lower than the median for the sector) definition for a zombie firm, the health care, energy, IT and real estate sectors in the EU have been impacted the most.

And, if rising interest rates (the biggest universal threat looming for zombie firms) continue, highly leveraged businesses may soon find that once-affordable borrowing will become difficult to repay.

It's not all black and white though in terms of definitions. Take Tesla and Netflix, for instance. They are both established businesses, each turning over billions of dollars and generating very little in the way of cash or profits. So, under the global definition, they are both considered zombie firms!

Why...

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