Zombie Companies - Has the Chancellor missed a trick?
In his quest for economic stimulus in the Autumn Statement, George Osborne failed to drive banks and borrowers to put the assets and resources of moribund businesses to good use.
For many months now observers have commented on the zombie companies that clog up our economy. Adam Posen of the Bank of England’s Monetary Policy Committee draws a parallel with Japan in the 1990s being stalled by unproductive borrowers on whose loans the banks could not afford to take losses. Although Posen’s observations were seeking to promote central bank monetary stimulus in continental Europe, the Bank of England has been expressing concerns about domestic bank forbearance since June 2011.
The many companies with low or no profitability or cash flow are adding nothing to the economy. Yet they tie up resources. Banks are increasingly concerned about zombie companies, but it is getting no easier for either the banks or their customers to generate positive growth. Without growth there will be no economic recovery.
The banks should stop holding on to this unproductive debt. The pretence that it is worthy of recognition in the banks’ capital ratios must be abandoned. The companies need freeing from the burdens of their creditors through an insolvency process, if they cannot be turned around
Although lending banks are feeling pretty bruised and the Bank of England is insisting they build up their financial buffers to withstand the current “extraordinarily serious and threatening situation”, tightening the definition of non performing loans so that loans to zombie companies are not counted towards the banks’ capital adequacy would have a number of benefits.
In the long term banks’ balance sheets would be strengthened. The business and resources that would be recycled through turnaround or insolvency would stimulate the economy, with entrepreneurs free from unpayable debt burdens once again being able to generate wealth.
Chris Laughton is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this post are personal to the author. If you would like to discuss the contents of this post with Chris you can call him on 020 7353 1597.
Date: 3rd December, 2011
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