Zombie company
A "zombie company" refers to a business that is unable to generate sufficient revenue to sustain itself without external financial support, typically in the form of government bailouts or loans from financial institutions. These companies are often burdened by high levels of debt, making them unable to reduce their financial obligations while only managing to cover operating expenses and interest payments. The term was first introduced by Edward Kane in 1987, originally describing struggling savings and loans organizations, and resurfaced prominently after the Great Recession when many companies continued to rely on bailouts despite ongoing financial difficulties.
Zombie companies are characterized by stagnant operations, as they lack the capacity to grow or invest, and they pose a significant risk to the economy. Their dependence on low interest rates means that any increase in rates could lead to defaults, jeopardizing not only their survival but also impacting the financial institutions that back them. Public opinion on the existence of zombie companies is divided; some advocate for allowing them to fail to free up resources for more productive businesses, while others express concern over job losses and the potential collapse of essential service providers. Overall, zombie companies highlight the complex interplay between financial support, corporate viability, and economic health.
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Zombie company
A zombie company is an organization that cannot generate enough money to survive on its own and subsists on bailouts by the government or loans by financial lenders. Zombie companies typically are deep in debt and cannot generate enough revenue to pay off these debts. They may make just enough money to meet operating costs and pay interest on their loans but not enough to reduce their debts. Zombie companies typically are stagnant and cannot grow or invest. They put a strain on a country's economy and can block funds from going to potentially productive companies.
Overview
Edward Kane, a professor at Boston College in Newton, Massachusetts, first coined the term zombie company in 1987 in reference to savings and loans organizations that had failed because of commercial mortgage losses. These organizations continued to operate with the help of banks, with the assumption that the market would improve. Banks gave these companies loans in the hopes they would eventually become self-sufficient and generate enough money to pay back the funds. This did not happen, and the companies continued to struggle to pay their debts in the years that followed. The concept of zombie companies again emerged after the Great Recession of the late 2000s, when many more businesses received government bailouts yet continued to be trapped in debt.
Zombie companies typically have very high levels of debt, yet they are able to make enough revenue to continue operating. They generate enough funds to pay employees, pay taxes, and pay fixed and variable operating costs. They are able to pay the interest on their loans but usually cannot contribute any money to the principal. They are dependent on low interest rates, and any increase in rates will financially jeopardize or even bankrupt the company. Zombie companies are unable to restructure or grow in any way because of their debts. They are merely existing on the funds they make and their loans or bailouts. They generally cannot acquire any new loans to help them grow or invest.
The cycle developed to protect zombie companies hurts lenders, other viable businesses, and the economy. Zombie companies pose risks to a country's economy. If the country raises interest rates, this puts companies at risk of defaulting on their loans, which harms the banks or government who supported the companies. In addition, zombie companies can put a strain on new ventures that are unable to secure loans because the banks have too much money invested in struggling companies. Zombie companies can hold back productive and innovative businesses that could help drive the economy forward.
Public opinion is mixed on zombie companies. Some people believe that the government and lenders should allow zombie companies to fail and stop bankrolling these indebted businesses. They should stop allowing them to refinance their debts, even if this means the company ceases operations. This would allow growing and productive firms to access credit and funds once tied to zombie companies. Unlike zombie companies, these new ventures could help stimulate the economy and provide jobs and investment opportunities. Other people believe that too many people will lose their jobs if zombie companies are allowed to fail. In addition, businesses that provide vital services may go out of business.
Bibliography
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