Low interest rates spawn rise of zombie firms

LONDON, Sept 24 (Reuters): Decades of falling interest rates have led to a sharp increase in the number of "zombie" firms, a report for the Bank for International Settlements said, potentially threatening economic growth and preventing interest rates from rising.

Economists generally define a zombie firm as one that is at least 10 years old but is unable to cover its debt servicing costs with its profits - a definition that would currently fit the likes of electric car maker Tesla and streaming giant Netflix.

Lower borrowing costs should in theory reduce the number of zombie firms, which tend to be less productive than other companies, as their interest expenses are reduced.

But lower rates also ease the pressure on both the firms themselves and their creditors to clean up balance sheets, the report noted.

Lenders then sometimes continue to provide 'evergreen' loans to firms that may not be able to pay them back.

"Should this effect be strong enough to reduce growth, it could even depress interest rates further," the authors of the study in the BIS' latest report found.

The study also included a narrower definition of a zombie firm, where future profitability was also expected to be low.

By both measures, it found the prevalence of such companies had increased significantly since the 1980s, and there had been a clear change in zombies' behaviour which coincided with interest rates beginning to fall.

Zombie firms took on more debt and disposed of fewer assets after 2000, a trend which continued after the financial crisis of 2008-2009 when the world's major central banks effectively cut their rates to zero or even lower.