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Zombie Companies are killing the economy

Zombie companies – the living dead that cannot repay debt or invest to grow – are a serious drain on the economy.

I wrote almost a year ago on this theme, suggesting that the Chancellor had missed a trick in failing to tighten the definition of non-performing loans so that loans to zombie companies are not counted towards banks’ capital adequacy.

Other commentators have been equally (or more) outspoken.  Jon Moulton is one of the more high profile proponents of the view that zombies should be allowed to fail and go through an insolvency process, enabling the assets to be recycled in a new environment where value can be generated.  “We’re not letting the Darwinian system work at all”, he says. Another recent commentator is Anthony Hilton in the Evening Standard. "Maybe there are too few insolvencies"  on 1 November 2012

The 13 November 2012 edition of BBC Radio 4’s File on 4 programme “The Zombie Effect” explores this phenomenon and the accompanying article by Hugh Pym includes an interview with Jon Moulton. The programme carries a range of perspectives and is worth listening to. For me the only jarring note was Derek Sach’s apparent proposition that insolvency destroys all jobs and value and it is better to have a troubled company continue unless insolvency is inevitable. In reality, insolvency procedures, when applied early enough, can often facilitate the transfer of businesses and assets with minimal loss of jobs or value. Whilst Derek may not seek to “extend and pretend”, the interests of banks’ shareholders are not always coincident with those of other stakeholders in a troubled business.

 

 

Date: 14th November, 2012
Author: Chris Laughton

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