"COVID-19 Response Measures Fuel Production of US Zombie Companies"…Concerns Over Weak Firms Rise Amid Ultra-Low Interest Rates

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The economic policies introduced by the U.S. Federal Reserve (Fed) to respond to the economic damage caused by the novel coronavirus infection (COVID-19) are raising concerns about further increasing the number of insolvent 'zombie companies' that cannot manage their debt, the Washington Post (WP) reported on the 23rd (local time).

WP cited data from Deutsche Bank Securities, stating that about 20% of U.S. publicly traded companies already qualify as zombie companies surviving on debt, and that this proportion has doubled since 2013. Generally, zombie companies are defined as those that have not generated sufficient earnings or operating profits to cover interest payments for three consecutive years.

Zombie companies have surged in recent years due to the prolonged ultra-low interest rates. The environment of easy access to funds has reduced the number of bankruptcies. Torsten Slok, Chief Economist at Deutsche Bank Securities, explained, "This is not to say that the Fed should not act," but "there are side effects to aggressive intervention."

The problem, WP pointed out, is that while this situation may stimulate the economy in the short term, it poses significant risks in the medium to long term in terms of productivity, investment, and competitiveness. As the number of zombie companies increases, the economy itself weakens further, and central banks are more likely to hesitate to raise interest rates.

According to the Fed, non-financial corporate debt increased by about 19% in the first quarter of this year, marking the highest growth rate in the past 40 years. The amount of new corporate debt in the first quarter was $3 trillion, ten times higher than the previous quarter. Additionally, the number of companies rated 'CCC' or below by credit rating agency S&P stood at 256 as of the 31st of last month, nearly double the number during the 2008-2009 global financial crisis.

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