Are European zombie companies facing a wave of bankruptcies after the increase in interest rates?

Corporate bankruptcies have eased in most European countries in recent years, helped by the economic recovery and extremely low lending rates. Although the resultant cost-savings are welcome on the corporate front, there is a danger that the prolonged low interest rate environment might favour the emergence of zombie companies. The concerns are directed at the time when interest rates will rise again significantly. This is likely to overextend many zombie companies and could trigger a wave of bankruptcies.

There is little risk in Germany and France that a significant rise in interest rates could lead to a wave of bankruptcies. Companies here mainly use medium and long-term fixed interest rates that secure low interest rates over a longer period of time. The low non-performing loans ratio for corporate loans in particular demonstrates a lack of zombie companies. On the other hand, Portugal, Italy and Ireland would have to be worried about a rapid increase in the number of insolvencies as a result of higher interest rates. High NPL ratios are indicative of a greater dissemination of zombie companies. The situation in Italy is compounded by a high share of short-term loans that could lead to a faster increase in the companies’ interest expenses.

A wave of bankruptcies among zombie companies suppresses economic development and can plunge a country into recession. There is another threat, especially within the single European market, that negative economic development could also affect other countries. Countries with a troubled banking sector could also experience severe setbacks in the process of reforming and consolidating the sector. The longer the phase of low interest rates persists, the greater the problems that amass. A change in monetary policy is therefore urgently needed as soon as possible, but one whose effects are nonetheless controlled. The banks in question must give top priority to the sustained reduction of bad loans.

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