The mother of all economic crises is coming and politicians will be able to do little to prevent it. And the first fatalities of the debacle will be the so-called zombie companies.
That is the forecast Nouriel Roubini, Professor Emeritus at New York University’s Stern School of Business and CEO of Roubini Macro Associates. Although he has earned the nickname “Dr. Doom” for his accurate pessimistic forecasts in times of financial storms.
He was one of the first to spot the Great Financial Crisis of 2008, which was sparked by predatory lending to low-income homebuyers, excessive risk-taking by international financial institutions, and the bursting of the housing bubble in the United States. .
His cataclysm radar has been activated again in 2022. Roubini has warned for months that a recession in the United States is inevitable and it will cause a global stagflationary debt crisis.
In early December 2022, he forecast the impact the recession will have on the US stock market, despite the apparent slight rebound in indices.
“In a brief, shallow recession, typically from the top to the bottom, the S&P 500 is down 30%,” Roubini told Bloomberg. “So even if we have a mild recession… another one will fall 15%.” He added that if we go through another crisis not as severe as 2008, stocks would lose another 25%.
Faced with this situation, the Federal Reserve will be forced to raise interest rates to 6% to combat inflation, according to the economist, and that will leave zombie companies in serious trouble.
History of zombie companies
Zombie companies are those that earn just enough money to continue operating. and pay the installments of their debts, but they cannot finish paying what is owed in full. These companies are barely subsisting because they only manage to cover general expenses like salaries, rent, interest payments on debt, but they do not have the excess capital they need to invest and stimulate their growth.
An investigation of Harvard Business Review revealed that the story of zombie companies began during the Japan’s “lost decade” in 1990. As Japan’s economy began to decline, some Japanese companies could not even afford to pay the interest on their debts. Normally, these companies would have gone bankrupt, but the banks chose to let the companies pause payments so as not to admit to their shareholders that it was a bad loan. In reality, what the banking sector did was to prolong the agony of those companies for years.
That phenomenon was not limited to Japan. That mechanism was used in many countries during the 2008 financial crisis. the Organization for Economic Co-operation and Development (OECD) said in a 2017 post that zombie companies appeared to be on the rise in the economies of Belgium, Finland, France, Italy, Korea, Slovenia, Spain, Sweden and the United Kingdom. And that this increase seemed related to slow productivity growth.
The specialists pointed out that the existence of zombie companies harms the economybecause it relieves pain in the short term but prevents the birth of new companies and the strengthening of the most productive companies.
Analysts of Bank for International Settlements They explained that in the countries that managed to reduce interest rates the most were those where the proportion of zombie companies increased the most. They also identified that The industries with the highest percentage of zombies es were those in the natural resources sector such as coal and metalsfollowed by the pharmaceuticals.
In Roubini’s view, zombie companies were bailed out during the COVID crisis, through rock bottom interest rates and a policy in which the Federal Reserve bought mortgage-backed securities and government bonds to boost lending and investment in the economy. .
The beginning of the end
Roubini has predicted that the years of extremely lax fiscal, monetary and credit policies are over.
Central banks will need to protect price stability with an increase in interest rates And that will hit the zombie companies’ debt-servicing costs hard.
Just as individuals will see their real income eroded by rising inflation, businesses face a strong rising cost of borrowing, a decline in your income and a decline in asset values, in a string of blows from which they will not emerge unscathed.
“Worse yet, these developments coincide with the return of stagflation (high inflation coupled with weak growth). The last time advanced economies experienced such conditions was in the 1970s. But at least back then, debt ratios were very low. Today we are facing the worst aspects of the 1970s (stagflationary shocks) along with the worst aspects of the global financial crisis. And this time, we can’t just cut interest rates to stimulate demand,” Roubini wrote in a Project Syndicate opinion piece.
In the near future, the arrival of “the mother of all stagflationary debt crises” and the end of the firms of the walking dead will be inevitable.
Fuentes: Fortune, Yahoo, Harvard Business Review, Project Syndicate.
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