Conjoncture

Europe: the shock of Covid-19 and the fear of accelerated zombification

Eco Conjoncture n°3 // March 2021  
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2
EUROPE: THE SHOCK OF COVID-19 AND THE FEAR OF ACCELERATED ZOMBIFICATION  
Looking beyond the short-term economic shock, the Covid-19 pandemic and the exceptional health protection  
measures introduced to contain it raise many questions as to the lasting consequences of the crisis. The issue of  
zombie firms, which is far from new, has taken on a whole new dimension, as their weight in developed economies  
has progressively increased since the 1980s. Massive public interventions to tackle the effects of the pandemic,  
whether by governments – debt moratoriums, cancellations of employer social security contributions, widespread  
use of short-time working schemes, etc. – or by central banks – increase and prolongation of asset purchases schemes  
could result in keeping non-viable companies afloat, raising fears of a zombification of economies.  
Definitions  
The current situation, causes and consequences of  
zombification  
A zombie firm is generally defined as any firm that is active in the  
market but with low productivity, high debt and poor profitability. The  
definition and measurement of the phenomenon are not subject to a  
widespread consensus. Amongst the existing versions, we would refer  
in particular to that of the OECD (Adalet McGowan et al, 2017), which  
defines a zombie firm as one that has existed for more than ten years  
and whose operating income has not covered debt servicing costs for  
Where are we now? A brief overview of current condi-  
tions  
Zombie firms now play a more important role in developed economies  
than they did in the past. According to Banerjee and Hofmann (2020),  
who looked only at listed companies (the number of listed zombie  
firms as a percentage of the total number of listed firms), 15% of firms  
could be classified as zombies in 2017, from around 4% at the end of  
1
a period of more than three consecutive years . The Bank of France  
uses another definition, that proposed by Caballero et al (2008) in their  
2
pioneering article on zombie firms in Japan : a zombie firm refers to a  
6
the 1980s . Over the past three decades, this proportion has tended to  
company that is fragile but that benefits from particularly favourable  
rise following crises and then fall again in subsequent years. However,  
the zombification phenomenon has become more persistent.  
3
,4  
financing terms . Banerjee and Hoffmann (2020) consider a zombie  
firm to be an unprofitable company with a low market valuation for  
5
Although there are differences in estimates of their number, the rising  
trend in the share of zombie firms in advanced economies is widely  
a two-year period . Whatever definition one uses, the identification of  
zombie firms requires a distinction to be drawn between a temporary  
fall in a company’s cash reserves (liquidity problem) and its inability to  
meet future debt repayment deadlines (solvency problem).  
recognised. This said, as demonstrated by the work of Hallak et al  
7
(
2018) , the picture varies considerably across European countries.  
For instance, Greece is the European economy with the greatest  
share of zombie firms, at close to 25%. However, this 2013 estimate  
should be treated with some caution given the highly difficult Greek  
macroeconomic situation at the time. The proportion in Spain (at  
around 20%) is twice that in Italy or France. The share of capital held  
in zombie firms is also significantly higher in Greece than in France or  
The issue of zombification was widely discussed following the Japanese  
crisis of the 1990s, after the bursting of real estate and financial  
market bubbles that weakened the country’s economy. Looking beyond  
the Japanese example, the current shock means that the issue has  
reared its head again, raising a number of questions. Where are we  
now, particularly in Europe? What are the causes, real or monetary, of  
the zombification of economies? Are these economies suffering from  
lasting macroeconomic effects, most notably in terms of productivity?  
Will the current crisis and public policies supporting economic activity  
accelerate the phenomenon of zombification? If so, what would a  
suitable response be? This article will attempt to provide some aspects  
of the answers. We will focus our analysis specifically on European  
countries. We will examine mainly the macroeconomic situation, so  
will not cover all aspects of the question in detail. To this extent, this  
article should be seen, above all, as food for thought.  
8
Germany. This hierarchy has been confirmed by the work of the OECD .  
How can we explain the rise in zombification?  
As discussed in the introduction, the zombification phenomenon  
has grown in scale since the 2000s, mirroring the earlier pattern in  
Japan. It should be noted that in the early 1990s Japan suffered a long  
deflation of real estate and financial market assets, which undermined  
the value of collateral. Zombification was in part related to difficulties  
in the banking sector. Numerous analyses of the situation in Japan  
have highlighted the lack of a rapid restructuring of banks following  
the bursting of the bubble and the rise in non-performing loans. The  
authorities’ response was thus too late and too timid. In order to avoid  
1
Adalet McGowan et al (2017), The walking dead? Zombie firms and productivity perfor-  
mance in OECD countries, OECD working papers  
R.J. Caballero et al, Zombie lending and depressed restructuring in Japan, American  
Economic Review, 2008  
Zombie firms benefit from loans granted at interest rates lower than would reflect their  
9
booking losses, Japanese banks continued to lend to unprofitable firms .  
2
In reality, for a bank, accurately assessing the capital losses in the  
event of non-redemption of a loan leads to an increase in provisioning  
and a deterioration of its financial situation.  
3
risk profile. More precisely, “a company is assumed to have obtained particularly ad-  
vantageous financing terms (very low rates) if the rate of its loan is below the first decile  
of the healthiest companies, that is to say the highest rate offered to 10% of companies  
benefiting from the lowest interest rate and the best rating or notation from the Banque  
de France”, (Avouyi-Dovi et al, 2017)  
6 R. Banerjee et B. Hofmann., Corporate Zombies: Anatomy and life cycle, BIS Working  
Papers, September 2020.  
7 I. Hallak et al, Fear the walking dead? Incidence and Effects of Zombie Firms in Europe,  
European Commission, 2018  
8 Adalet McGowan et al (2017), The walking dead? Zombie firms and productivity perfor-  
mance in OECD countries, OECD working papers  
9 See footnote, page 3  
4
S. Avouyi-Dovi et al, Y-a-t-il des entreprises zombies en France ?, Bloc-notes Eco, Banque  
de France, March 2017  
R. Banerjee and B. Hofmann, Corporate Zombies: Anatomy and life cycle, BIS Working  
5
Papers, September 2020. The precise criteria are as follows: interest coverage rate of less  
than 1 and a Tobin’s Q ratio below the sector median.  
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Thus, zombification could result from banks’ difficulties, particularly  
the most vulnerable ones for which making non-profitable loans  
remains the most viable solution (difficulties which, in some countries,  
could be amplified by the close links between banks and their client  
firms through crossed shareholdings). This outcome is consistent with  
the fact that zombie firms are more likely to have ties with fragile  
SHARE OF ZOMBIES FIRMS (% OF TOTAL FIRMS)  
1
2
0
8
6
4
2
0
2007  
2010  
2013  
1
0.3  
1
8
.7  
10  
banks, as has been highlighted by a number of studies . Other studies  
(Acharya et al 2020)11 have suggested that lending to zombie firms has  
a deflationary effect by creating excess production capacity. This can  
complicate the task of monetary authorities and delay an increase in  
interest rates (see following paragraph). According to some authors,  
one of the main reasons for the proliferation of zombie firms in  
Europe, is the rapid and long lasting fall in interest rates since the  
early 1980s which has reduced financial pressures on all companies.  
Massive interventions by the European Central Bank (ECB), through  
cuts in its policy rates and a substantial asset purchasing programme  
7
.6  
6
.7  
6
.2  
5
.8  
5
2
.8  
2
.2  
2
2
.8  
1
(
Quantitative Easing), have fed through into the loans granted to non-  
Spain  
Japan  
Italy  
France  
financial companies in the eurozone, whose borrowing costs have fallen  
CHART 1  
SOURCE: ADALET MCGOWAN ET AL. (2017), OECD in a virtually continuous manner (Chart 1). The fall in rates may have  
thus encouraged increased financial risk-taking by firms that would  
have behaved differently had rates been higher.  
THE SHARE OF CAPITAL SUNK IN ZOMBIE FIRMS IN 2013 (%)  
The supply of liquidity from central banks and the relaxation of financing  
conditions may have indeed contributed to supporting viable firms that  
only faced temporary cash flow needs, but, in the meantime, may  
also have supported non-viable firms. Without monetary – or fiscal –  
interventions, the weakest firms would not withstand negative shocks  
and would be squeezed out of the market. That said, if such policies  
persist, they can maintain non-viable firms in the market and limit  
the ‘ordered’ restructuring of firms, through the bankruptcy process  
30  
25  
20  
15  
10  
5
0
(
see below). However, the link between low interest rates and zombie  
firms seems somewhat too reductionist - particularly in the eurozone –  
1
2
and is not fully established in the literature . Furthermore, as already  
discussed, the weight of zombie firms varies significantly between the  
countries in the eurozone, even though member States all share the  
same monetary policy.  
Thus it is difficult to blame low interest rates as the only catalyst for  
zombification. The best brake on this phenomenon could also be stron-  
ger economic growth13 and a higher level of investment. The issue of  
the deficit of investment relative to the level of available savings is a  
pressing topic in the global economy at the moment, particularly in the  
eurozone. Within the currency union, the imbalance between savings  
and investment (public and private) has grown since the crisis of 2008-  
Greece  
Italy  
Spain  
Germany  
Japan  
France  
SOURCE: ADALET MCGOWAN ET AL. (2017), OECD  
CHART 2  
AVERAGE COST OF NEW LOANS TO NFCS IN THE EUROZONE  
, annualized  
2
009. An increase in investment, at constant savings levels, would be  
beneficial for medium-term economic growth and would reduce the  
downward pressure on interest rates.  
%
7
6
5
4
3
2
1
It is worth highlighting a reciprocal causality: on the one hand, the  
fall in interest rates could amplify the process of zombification, which  
depresses investment. On the other hand, weak investment levels  
relative to savings depress both economic activity and interest rates.  
The two effects – monetary and real – may keep zombie firms in the  
market and therefore appear difficult to isolate. Lastly, the effects of  
higher interest rates on the zombification process are uncertain.  
1
0 D. Andrews et al, Breaking the shackles: Zombie firms, weak banks and depressed  
restructuring in Europe, ECB, February 2019  
1
1 V.V. Acharya et al, Zombie credit and (dis-)inflation: Evidence from Europe, Federal  
Reserve Bank of New York, Staff Reports December 2020  
0
4
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
SOURCE: EUROPEAN CENTRAL BANK  
12 L. Laeven et al, Zombification in times of pandemic, VoxEU CEPR, October 2020  
13 U. Bindseil and J. Schaaf, Zombification is a real, not a monetary phenomenon: Exorcis-  
ing the bogeyman of low interest rates, VoxEU CEPR, January 2020  
CHART 3  
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Any increase, all other things being equal, would have the significant productive, more heavily indebted and less profitable than others.  
1
4
effect of forcing firms out of the market . Meanwhile, without the Banerjee and Hofmann (2020) add the following characteristics to  
substantial monetary support of recent years, current GDP levels and this profile: much smaller companies, which recruit and invest less (in  
1
5
inflation in the eurozone would have been much lower .  
physical and intangible assets), negative cash holding, paying fewer  
dividends, issuing more shares and benefiting from “subsidised” loans  
(
defined here as loans with interest rates that are not significantly  
higher than those of non-zombie firms despite zombie firms’ lower  
profitability and higher risk profile). Although they are more heavily  
indebted, they also generally seek to reduce their borrowing.  
EFFICIENCY OF BANKRUPTCY PROCEDURES: WORLD BANK RANKING*  
30  
25  
20  
15  
10  
5
0
2
6
Why is this worrying?  
2
1
The increase in the number of zombie firms could have contributed to  
the downward trend in potential growth in OECD countries since the  
end of the 1990s, through two channels: the slowdown in total factor  
productivity (TFP) and lower business investment.  
18  
Before becoming zombies, companies experience a deterioration in  
profitability, productivity and investment levels. Once they have become  
zombies, these firms remain less productive and tend to invest less  
4
1
8
than other companies , which slows down productivity gains in the  
economy. Thus, according to estimates from the Bank of International  
Germany  
Spain  
Italy  
France  
19  
Settlements (BIS) , when the share of zombie firms in the economy  
*
Ranking out of 190 countries  
increases by 1%, growth in TFP falls by around 0.3 percentage points  
(
pp). When a large number of non-productive companies remains in  
Note: The World Bank index combines a number of indicators including the duration and cost of the process, together with  
qualitative information on the administrative management of these procedures. The higher the position in the rankings, the  
more efficient the bankruptcy procedure. For a detailed methodology, see https://www.doingbusiness.org/en/methodology/  
resolving-insolvency  
the market, the process of “creative destruction” is affected. In theory,  
better-performing companies should push their weaker competitors out  
of the market, to enable – through composition effects – an increase in  
average productivity and a reallocation of workers to more productive  
firms. Most empirical studies confirm that the survival of insolvent  
CHART 4  
SOURCE: REFINITIV, WORLD BANK  
2
0
firms is a drag on employment , productivity and allocation of capital  
Other structural factors, specific to each country, partly explain to viable firms. The less efficient allocation of labour resources also  
zombification and the differences in its trend between eurozone works through the phenomenon of trapping highly-qualified workers  
countries. Several studies stress the importance of the way in which in companies with relatively low productivity, as has been observed in  
struggling companies are dealt with in different countries. When the many OECD countries. All these factors eventually damage potential  
restructuring system is efficient, with relatively short and low-cost growth.  
procedures, the reallocation of bank loans from struggling firms to  
more productive firms is quicker and the depreciation of assets is  
more limited. Conversely, when the system is less efficient, the process  
of “creative destruction” is held back. According to some authors, if  
Maintaining non-viable firms in the market also creates congestion  
effects in the real economy: an increase in competition, which, without  
stimulating innovation, puts downward pressure on prices and thus  
affects profitability at unchanged costs. This also raises barriers  
to entry for new market entrants. Moreover, inefficient allocation of  
resources can, by extension, reduce productivity gains, as seen in  
losses” are considered to be significant by banks, it may be in their  
16  
interest to continue to lend to these vulnerable companies . This  
perpetuates the zombification cycle. On this point, and based on World  
21  
southern Europe .  
1
7
Bank estimates , we can see major differences between European  
countries, with France and Italy both having long bankruptcy processes  
In parallel, some studies suggest a crowding-out effect regarding  
2
2
the banking system : supporting zombie firms makes it harder, both  
directly and indirectly, for viable firms to access credit. According  
to these studies, the access to credit for healthy firms is limited  
first indirectly, by damaging competition from zombie firms whose  
continued existence in the market drives down prices and thus reduces  
profits for their viable rivals.  
(
over 18 months on average). Expanding our sample to include the rest  
of the world, Europe is well-positioned overall, with 14 countries in the  
top 20 of the rankings.  
To conclude this section, alongside the macroeconomic causes, we will  
consider some factors from a firm’s perspective. Is there a ‘typical’  
zombie firm? How does a firm turn into a zombie? It is not just a  
question of macroeconomic conditions: are there prior conditions or  
propensities? In board terms, zombies are companies that are less  
18 See footnote, page 4  
1
9 R. Banerjee and B. Hofmann, The rise of zombie firms: causes and consequences, BIS,  
September 2018  
0 R. Banerjee and B. Hofmann (2018) show that a 1pp rise in the proportion of zombie  
2
1
4 M. Obstfeld et R. Duval, Tight monetary policy is not the answer to weak productivity  
growth, VoxEU CEPR, January 2018  
5 Philip R. Lane, The monetary policy toolbox: evidence from the euro area, European  
Central Bank, February 2020  
6 D. Andrews and F. Petroulakis, Breaking the shackles: zombie firms, weak banks and  
depressed restructuring in Europe, BIS background paper, November 2017  
7 These results vary from one estimate to the next. The OECD, for instance, puts France in  
a higher position when it comes to bankruptcy procedures.  
firms reduces employment growth in non-zombie firms by around 0.3pp, and the  
investment rate by 1pp. McGowan et al (2017) carried out a similar study and also found  
a significant effect on investment and employment, particularly in southern European  
countries (Spain, Italy, Greece).  
21 G. Gopinath et al (2017), Capital Allocation and Productivity in South Europe, Federal  
Reserve Bank of Minneapolis working paper  
1
1
1
22 D. Andrews and F. Petroulakis, Breaking the shackles: Zombie firms, weak banks and  
depressed restructuring in Europe, OECD, 2017  
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This drop in profits is then viewed negatively by lenders, who are hence companies have stored up this financing to cover future expenditure.  
less willing to lend for investment projects. On top of this, a direct Although the situation varies from country to country, margin levels  
effect, resulting from bank provisioning, is mentioned by Acharya et al have stabilised overall since the crisis of 2008 whilst the need (or ca-  
23  
2019) . This study concludes that less well-capitalised banks can set pacity) for financing has reduced (increased). However, this last point  
(
aside insufficient provisions for losses on non-performing loans. These saw a degree of deterioration in 2018 and 2019.  
loans are therefore extended and come to represent a significant share  
Liquidity (and solvency?) risks have risen during the  
of lending by poorly-capitalised banks; and the balance of lending  
capacity then becomes insufficient to provide lending to more viable  
crisis  
firms. However, the new IFRS9 accounting standards, in force since The Covid-19 crisis is unprecedented and three-pronged. It is simul-  
2
018, seeks to mitigate this effect. The restriction of borrowing options taneously a shock to demand, supply and uncertainty. In contrast to  
for healthy firms makes it harder to invest, such that once again, 2008-2009, it is not the result of excessive risk-taking by economic  
zombification holds back potential economic growth.  
agents. The scale of the contraction in economic activity in 2020 was  
unprecedented and could leave a lasting mark on the productive fabric  
of European nations. The economic catch-up process will depend on  
the resilience of companies as we come out of the crisis and the conti-  
nuation, or otherwise, of fiscal support over the coming quarters. On a  
macroeconomic level, potential growth has been affected throughout  
the crisis, due to in particular the drop in the number of hours wor-  
The economic shock from Covid-19 has hit growth prospects and  
increased the threat of a spread of zombie firms. Although this is a real  
concern, this has to be put in perspective.  
MACROECONOMIC IMPACT OF ZOMBIFICATION ON POTENTIAL GROWTH  
2
4
ked per employee. According to ECB estimates , by 2022 the level of  
eurozone potential output would still be 3% below the forecast carried  
out before the crisis.  
Zombification  
By sector, services have been harder hit by health restrictions than  
industry, especially in countries where these measures were the most  
stringent (France and Spain for example) . Transport services, retail  
and hotels and restaurants displayed a particularly sharp fall in their  
added value during the first half of 2020 (Chart 6).  
Obstacle to non-productive  
Drag on productivity  
firms leaving the market  
2
5
Market congestion  
Harder to access finance  
(
eviction effect)  
Increased competition,  
reduction in market  
prices for products  
Higher barriers to entry,  
growth of new firms  
becomes more difficult  
Firms in these sectors may therefore face a greater lack of liquidity  
than others, given the rapid drop in their revenues and the limited  
capacity to adjust their costs in the short term (even though short-time  
working schemes helped mitigate these costs to some extent). If these  
same companies faced financial difficulties before the crisis, these li-  
quidity issues could, in the end, increase the risk of defaults.  
Impact on revenue and  
profitability  
rag on employment  
Drag on productivity  
Drag on capital accumulation  
Lower potential growth  
NFCS DEBT RATIO (% OF GDP)  
SCHEME 1  
SOURCE: BNP PARIBAS  
FRA  
EMU  
GER  
UK  
ITA  
USA  
SPA  
1
10  
00  
Covid-19 crisis: a risk of an acceleration in zombi-  
fication?  
1
9
0
What was the financial condition of private European  
firms before the pandemic struck?  
80  
7
0
0
The overall financial position of European non-financial companies  
6
(
NFCs) had improved since the 2008 crisis, in terms of their level of  
indebtedness, which has fallen in virtually all European countries  
Chart 5). Debt reduction was particularly noticeable in Spain and  
50  
(
40  
Portugal, where a significant rebalancing took place after the sharp  
increase in real estate prices. The improvement has continued un-  
til 2019. In 2020, NFC debt started to rise again, steeply, against the  
background of the crisis – driven notably by the substantial loan  
guarantee schemes introduced by governments. Part of the increase  
in European NFCs’ debt in 2020 can be correlated with the matching  
increase, in certain countries (notably France), in deposits, as some  
30  
9
9 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
CHART 5  
SOURCE: BANQUE DE FRANCE  
2
4 K. Bodnàr et al, The impact of Covid-19 on potential output in the euro area, Economic  
Bulletin Articles, European Central Bank, November 2020  
25 As shown by Oxford University’s Stringency Index.  
2
3 V.V. Acharya, T. Eisert, C. Eufinger and C. Hirsch, Whatever It Takes: The Real Effects of  
Unconventional Monetary Policy, The Review of Financial Studies, September 2019  
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Measures introduced by national governments, such as the massive  
use of short-time working and government-guaranteed lending by  
banks, seem, however, to have significantly reduced liquidity risks for  
European companies. The same Bank of Spain report considers that  
three-quarters of liquidity needs could be covered by these guaranteed  
loans.  
CHANGE IN VALUE ADDED BETWEEN Q4 2019 AND Q2 2020 (IN %)  
Total  
Manufacturing industry  
Trade, transport, accomodation and catering activities  
0
10  
20  
30  
40  
50  
Firms are also facing difficulties in the labour market. According to the  
OECD, the share of the most-at-risk jobs is particularly high in Spain  
-
-
-
-
-
(
Chart 7), and remains more moderate in Germany and France. The  
structure of employment and the proportion of public-sector jobs affect  
these figures.  
***  
Conclusion: Is the Covid-19 shock an accelerator for  
zombification? Let’s not rush to judgement  
Germany  
France  
Italy  
Spain  
United  
Kingdom  
Despite the current difficulties and the likelihood that the health shock  
will have lasting consequences for the economy, fears of zombification  
should be tempered somewhat. First, it is difficult at this stage to  
have a clear view. The exceptional lockdown measures introduced  
by governments make it difficult at this stage to distinguish between  
companies suffering only from liquidity problems and those that are  
insolvent. More precisely, until the economic situation has been fully  
normalised it will probably be too soon to draw such a distinction and  
sort the firms worthy of support from the rest.  
CHART 6  
SOURCE: EUROSTAT  
SHARE OF EMPLOYMENT MOST ‘AT-RISK’ (% OF TOTAL EMPLOYMENT, 2019)  
Recreational services  
Food and accomodation  
Retail and wholesale trade  
Total at-risk jobs  
30  
25  
20  
15  
10  
5
0
The Covid-19 crisis raises twin fears: a wave of business failures on  
the one hand, or an insufficient number on the other. The smaller the  
wave, the greater the risk of zombification. However, we do not believe  
that one should worry (or at least not yet) about this political dilemma,  
which opposes on the one hand massive indiscriminate support that  
runs the risk of fuelling zombification, and on the other more limited  
support, allowing creative destruction but at the cost of higher  
unemployment and the loss of some viable businesses. Faced with  
the risk of zombification and the benefit of protecting productive and  
human capital, the latter wins out. The risk of feeding zombification  
is a lesser evil than that of destroying ‘good’ capital, especially as the  
former can be managed further down the line whilst the latter has  
bigger immediate and long-term consequences, which will be harder to  
reverse. In other words, the more the policy mix softens the economic  
shock, the more the consequences of the shock, which carry the risk of  
increased zombification, will be contained.  
Germany*  
CHART 7  
France  
Italy  
Spain  
*
DATA FOR 2018  
SOURCE: NATIONAL SOURCES, OECD, BIT  
2
6
According to estimates from the European Commission in May 2020 ,  
between 58% and 75% of the total lack of liquidity in Europe was  
focused on financially-vulnerable companies (in terms of debt to  
equity or EBIT to revenue ratios). Among the eurozone’s four biggest  
economies, the ECB’s research shows that Spain has the biggest  
share of firms facing either liquidity problems or with negative working  
capital and high levels of borrowing. These estimates were confirmed  
by Bank of Spain research , which indicated that nearly 70% of private  
firms in the country were likely to have additional liquidity needs  
between April and December 2020, with sharp increases in financial  
difficulties in tourism and leisure, the automotive sector and transport  
services. However, Spain is by no means alone, with a large number of  
companies experiencing liquidity issues in France and Germany too.  
Without massive fiscal support, the collapse of European economies  
would have been much worse than it has been. Financially healthy and  
productive companies could have been forced to the wall by temporary  
cash flow problems. The social consequences of the crisis, through  
a steeper increase in unemployment, would have been even longer  
lasting (particularly if one acknowledges Europe’s imperfect labour  
mobility between sectors and countries). Concomitantly, the very  
flexible and accommodating monetary policy from the ECB – and other  
major central banks – has allowed a widespread decrease in interest  
rates across a broad spectrum of maturities for all economic agents.  
In particular, this has facilitated fiscal support. Without it, sovereign  
spreads (the differences in yields on different countries’ government  
debt) would have widened, the risk of financial fragmentation would  
have resurfaced and companies in the more vulnerable nations would  
have suffered for a long time to come.  
2
7
2
8
2
6 Identifying Europe’s recovery needs, Commission staff working document, May 2020  
7 P. Lopez-Garcia, The impact of Covid-19 on potential output in the euro area, Economic  
Bulletin Articles, Box 2, European Central Bank, November 2020  
8 R. Blanco et al, Spanish non-financial corporations’ liquidity needs and solvency after  
the Covid-19 shock, Occasional Document, Bank of Spain, November 2020  
2
2
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7
Then, once the shock had eased and public support been scaled back,  
the European economy would have remained in a weakened state  
with corporate debt remaining high. Long-term unemployment could  
then have taken hold and business bankruptcies seen significant  
increases. Although business failures have so far been limited by public  
measures to support cash flow and temporary amendments to the  
legal framework for bankruptcy procedures – notably through waiving  
of the requirement for directors to declare a cessation of payments  
29  
this is only delaying the inevitable for a number of companies . As  
we come out of the crisis, attention will turn to borrowing levels at  
European companies. Already, on can expect a sharp rise in business  
3
0
bankruptcies in Europe in 2021 : Germany (+12% compared to the  
019 level), France (+25%), Italy (+27%) and Spain (+41%). As indicated  
2
in Section 2.b above, the increases in company bankruptcies and  
indebtedness will have fewer macroeconomic consequences in case of  
3
1
efficient debt restructuring or liquidation framework in place . In this  
area, Europe is relatively well positioned.  
If the risk of increased zombification cannot be rule out following the  
Covid-19 crisis, what can be done to address it? In the near future, one  
direct remedy is to strengthen firms’ balance sheets. This must happen  
through a strengthening of capital via, for example, participating loans  
as included in the France Relance programme – or the transformation  
of government-guaranteed loans into subsidies, a possibility also  
raised in France. It might also take the form of a restructuring of the  
debts of companies considered as viable. More broadly, in terms of  
macroeconomic policy, improvements to recovery and liquidation  
processes32 also form part of the measures to be taken. In the longer  
term, policies on competition, innovation, training and professional  
mobility are also powerful ways to tackle zombification, to the extent  
that they improve the creative destruction process and an efficient (re)  
allocation of resources. The outcome is that it is easier for firms to  
enter and leave the market. Taken together, such policies would boost  
potential growth in Europe, which represents the best way of holding  
back zombification.  
Raymond Van Der Putten  
raymond.vanderputten@bnpparibas.com  
Kenza Charef (apprentice)  
2
9 B. De Moura Fernandes, Défaillances d’entreprises en Europe: les amendements des  
procédures juridiques repoussent temporairement l’échéance, Coface, June 2020  
0 M. Lemerle, Calm before the storm: Covid-19 and the business insolvency time bomb,  
Allianz Research, July 2020  
1 O. Jordà, Zombies at large? Corporate debt overhang and the macroeconomy, Fed San  
Francisco, December 2020  
2 On this point, recent EU directives (shortening procedures and, especially, introducing  
3
3
3
preventative procedures) have been steps in the right direction. It is worth noting that the  
French legal system already has effective preventative tools to support firms in difficulty,  
before they reach the bankruptcy stage.  
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8
GERMANY: THE EFFECTIVENESS OF THE INSOLVENCY REGIME SHOULD CONTAIN THE RISK OF ZOMBIFICATION  
According to a recent BIS study (Banerjee and Hofmann, 2020), the share of zombie firms in the total number of listed NFCs is relatively low  
in Germany compared to other countries. Zombies account for around 10% of German companies, a percentage that has been fairly stable  
over the past decade.  
Recently, Deutsche Bundesbank updated a report on the weight of zombie firms in the German economy using the Bundesbank’s database  
1
of company financial statements . Zombie firms are defined as those unable to cover interest payments from operating income for a period  
of three consecutive years. Under another definition, Bundesbank researchers include all companies with negative cash flow for three  
consecutive years. The study concludes that, whichever the measure used, the share of zombie firms has fallen in recent years. On the first  
definition, this share dropped from 8% in 2007 to slightly under 6% in 2018. These two approaches do not corroborate the hypothesis that  
the fall in interest rates increases the phenomenon of zombification in the economy.  
There is a risk that the Covid-19 crisis will increase the number of zombie firms, given the introduction of massive government support  
schemes. According to the latest analysis by a panel of economists, conducted by the Ifo Institute and Frankfurter Allgemeine Zeitung (FAZ),  
8
6% of the panel believe that the number of zombie firms has “increased” or “strongly increased” in Germany since March 2020, for the  
following main reasons: the temporary waiver of the requirement to submit an insolvency notice, short-time working provisions, and lending  
and loan guarantees through the intermediary of the German state development bank (KfW).  
Thanks to these support measures, the number of corporate insolvencies fell in 2020 to around 17,000, from 18,749 in 2019. The German  
2
Economic Institute (IW) in Cologne believes that given a loss of 5% of GDP in 2020, Insolvencies would have been expected to rise to 21,560 .  
The Institute therefore concludes that support measures have created some 4,500 zombie firms. But these insolvency cases would only be  
the tip of the iceberg. In 2018, the country had 2.7 million companies, 330,000 of which had more than 10 employees. That year, 240,000  
companies ceased trading, but only 10% of those made use of insolvency procedures.  
Last November, the German Chamber of Industry and Commerce (DIHK) estimated that around 44% of German firms had taken advantage of  
3
one or more of the support measures available . Despite these measures, many companies could become insolvent. In an earlier DIHK report  
from May 2020, around 10% of companies indicated that they could face bankruptcy. In June 2020, the Ifo Institute even reported that one-  
4
fifth of businesses faced threats to their continued existence .  
It is likely that the large majority of companies will return to viability once Covid-19 restrictions are removed. Although the risk of a rise in  
the number of zombie firms cannot be ruled out, it is unlikely that this will be significant. In particular this is because Germany’s rules for  
companies in difficulty work well (see Chart 3). Under these conditions, banks will probably attempt to recover debts rather than roll over  
credit lines made available to these struggling companies.  
4
BOX 1  
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FRANCE: ZOMBIFICATION RISK IS UNDER CONTROL  
Estimates vary depending on the definition used, but France has a relatively small proportion of zombie firms. According to the Banque de  
1
France (2017) , across companies of all sizes, the percentage of zombies was 7.5% in 2014. The proportion was higher amongst SMEs than  
2
large companies. According to Coface (2018) , this percentage was 4.6% in 2016; higher than in Germany (3.7%), but less than in Italy (5.3%)  
3
or Spain (6.2%). France Stratégie (2019) estimated that, in 2015, zombie firms represented 5.3% of the total number of ‘mature’ firms,  
4
accounting for 4.6% of capital and 5.3% of the workforce. According to the OECD (2017) , zombie firms represented just 2% of total companies  
in France in 2013, compared to an average of 5% across the nine countries used in the sample (Belgium, Finland, France, Italy, South Korea,  
5
Slovenia, Spain, Sweden and the UK). Figures from the BIS (2020) are markedly higher, with zombie firms accounting for around 16% of the  
total in 2017 (due mainly to the use of a different sample).  
Changes over time in the percentage of zombie firms also differ from one study to the other. The figures are relatively stable for the Banque  
de France (with an observation period from 2006 to 2014), Coface (2013-2016) and the OECD (2003-2013). France Stratégie (2000-2015)  
reports a slight upward trend between 2010 and 2015, whilst the increase is more marked for the BIS (1980-2017).  
This process of zombification remains under control in France mainly because, with regards to the causes of this phenomenon, France ticks  
only two out of the four boxes: low interest rates and weak economic growth. France does not suffer from the same weaknesses in its banking  
sector as Italy, Spain or indeed Japan. France Stratégie’s analysis also concludes that the laws governing companies in difficulty work well.  
But this is not to say that there are no areas for improvement, particularly when it comes to reducing the length of collective agreement  
6
procedures .  
The increase in NFC indebtedness to a high level is a weakness for the French economy. However, the simultaneous increase in liquidity and  
7
capital helps limit the problem (Chart A) . Moreover, the various indicators of financial health, by company size, drawn from the Banque de  
8
France’s FIBEN database, paint a fairly reassuring picture of a strengthened financial structure, particularly amongst SMEs .  
The increase in the share of debt due to the substantial use of government-guaranteed loans is a particular cause for concern. This debt  
burden might prove too heavy relative to profits that have been weakened by the crisis and could thus produce a large number of zombies.  
Nevertheless, the risk of giving rise to a vicious circle of zombie banks and zombie firms appears limited, given the strength of the French  
banking system.  
FRANCE: GROSS FINANCIAL DEBT RATIO, % OF EQUITY (DEBT LEVERAGE)  
Small & medium-sized enterprises  
Intermediate-sized enterprises  
Large companies  
All firms  
130  
120  
110  
100  
9
8
7
0
0
0
CHART A  
60  
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19  
SOURCE: BANQUE DE FRANCE (FIBEN), MACROBOND, BNP PARIBAS  
1
2
3
4
5
6
7
8
See footnote, page 2  
Conference of 16 November 2020, “Impact de la crise et des mesures budgétaires 2020-21 sur les entreprises”, Institut des Politiques Publiques  
Haithem Ben Hassine, Catherine Le Grance and Claude Mathieu, Les procédures de défaillance à l’épreuve des entreprises zombies, France Stratégie, Note d’analyse n°62, October 2019  
See footnote, page 6  
See footnote, page 4  
Chloé Zapha, “Accélérer les procédures de restructuration en réponse au Covid-19?”, Bloc-notes Éco Banque de France, Billet n°192, 10 December 2020  
See Marie-Baïanne Khder and Clément Rousset, Faut-il s’inquiéter de la hausse de l’endettement des entreprises en France?, INSEE, Note de conjoncture, December 2017  
Maïté Graignon, Les PME ont abordé la crise de la Covid-19 avec une structure financière renforcée, Bulletin de la Banque de France n°232/1, November-December 2020. And, for  
an overall picture, Benjamin Bureau et Loriane Py, La situation financière des entreprises: forces et faiblesses à la veille de la crise sanitaire, Bulletin de la Banque de France n° 233/3,  
January-February 2021  
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1
0
Another set of concerns relates to the indiscriminate support provided to businesses, both viable and non-viable. As with government-  
guaranteed loans, cash flow support measures (deferrals or exemptions on employer contributions, short-time working schemes, solidarity  
fund) are available to all firms struggling during the crisis. Furthermore the criteria to receive help have been significantly relaxed and  
expanded over the months – given the scale of the shock – and now include the largest possible number of firms and situations (this is  
particularly true for the solidarity fund).  
9
According to IPP (2020), these emergency measures are nevertheless well-targeted on firms having suffered the biggest ‘Covid shocks’ . A  
joint report from CAE and France Stratégie (2020) – and the initial estimates from the French Treasury11  show no zombification of the  
10  
French economy thus far.  
The models used by the OFCE (2020)12 also show that in a counterfactual scenario, excluding Covid-19, some 4% of companies would in any  
1
3
event have faced liquidity problems by March 2021 . This figure rises to slightly over 10% in a scenario with short-time working scheme, and  
4% in scenarios without it (demonstrating the effectiveness of this scheme). When it comes to the total number of insolvent companies, the  
1
models predict a 2% share in the counterfactual, 3.4% for Covid-19 with short-time working scheme and 4.6% for Covid-19 without short-time  
working scheme. Apart from the contrasting performance between sectors, the greatest difficulties, both in terms of liquidity and solvency,  
seem to affect micro-companies and large companies, rather than SMEs and mid-sized firms. Micro-companies are most vulnerable to a  
lack of liquidity, and large companies to excessive level of debt. This study also shows that at times of crisis, market mechanisms become  
dysfunctional, resulting in a fairly substantial increase in the share of productive companies within the population of insolvent companies,  
across all sectors and sizes of company.  
For the time being, there has been no wave of post-Covid-19 business failures in France. In fact, it is quite the opposite (see Chart B). This  
might suggest a ‘calm before the storm’, but it is far from certain that there will be a storm. The fact that bankruptcies have not yet increased  
does not appear to be a sign of on-going zombification. Instead, it shows the effect of the measures taken, notably legislative changes that  
have temporarily modified the timing and details of the declaration of a cessation of payments. Given that this temporary measure expired  
on 24 August 2020, and given that there are 45 days in which to make the declaration, such declarations may have increased from October  
onwards. This moratorium is one of the measures highlighted as a possible vector of zombification. However, the first lockdown would have  
been the wrong time to unleash the process of creative destruction, and the emphasis was on protecting the productive fabric as a whole as  
far as possible. This observation holds true for all the measures taken: an exceptional crisis called for exceptional responses.  
FRANCE: NUMBER OF CORPORATE BANKRUPTCIES  
AND YEAR-ON-YEAR CHANGE  
2
0
0
0
65  
60  
55  
50  
45  
40  
35  
30  
1
-
-
-
-
-
10  
20  
30  
40  
50  
Year-on-year change (%, LHS)  
Number of corporate bankruptcies (aggregate over the last 12  
monts, thousands, RHS)  
25  
91  
93 95 97 99 01 03 05 07 09 11 13 15 17 19 21  
CHART B  
SOURCE: BANQUE DE FRANCE (FIBEN), MACROBOND, BNP PARIBAS  
9
1
Financial stability report, Box: the impact of the pandemic on the riskiness of firms, Bank of Italy, November 2020  
0 Mathieu Cros, Anne Épaulard and Philippe Martin (2020), Les défaillances d’entreprises dans la crise Covid-19: zombification ou mise en hibernation?, Focus CAE n° 051-2020 and  
Point de vue France Stratégie, 14 December  
1
1
1
1 Le billet d ’A gnès Bénassy-Quéré, “2021, l’année des zombis ?”, 7 January 2021, DG Trésor blog  
2 Mattia Guerini, Lionel Nesta, Xavier Ragot and Stefano Schiavo, Dynamique des défaillances d’entreprises en France et crise de la Covid-19, OFCE policy brief n°73, 19 June 2020  
3 Companies in difficulty independently of the crisis are generally smaller, less productive, more heavily indebted and with lower liquidity levels than the others.  
BOX 2  
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1
ITALY: A WEAK BANKING SYSTEM AND INADEQUATE BANKRUPTCY PROCEDURES, TWO CATALYSTS FOR ZOMBIFICATION?  
Italy is one of the countries most often cited when the presence of zombie firms in an economy is discussed. The OECD (2017) estimates  
that in 2013, nearly 19% of capital in Italian NFCs was invested in zombie firms, which is one of the highest ratios amongst OECD members.  
This high proportion of zombie firms can be linked back both to the economic difficulties experienced by the country following the 2008  
1
and 2011 crises and to the weakening of its banking system. According to Schivardi, Sette and Tabellini (2017) , this second factor has led  
banks to maintain credit lines for firms with low productivity, thus confirming the findings of other studies, notably those from Andrews and  
2
Petroulakis .  
3
Gopinath et al (2017) also showed that the fall in real interest rates in Italy – driven by the European convergence – contributed to  
stimulating investment, but this was directed mainly to firms that were financially solid but relatively less productive .  
4
Although the Italian banking system was experiencing a consolidation period up to the onset of the Covid-19 crisis – with the non-performing  
5
loan rate continued to fall – the epidemic will weaken the sector again, with legitimate fears of an amplification of the phenomenon of  
zombification. Although such risks had been somewhat mitigated by a reduction in NFC indebtedness in the years leading up to the pandemic,  
the crisis has brought a reversal of this trend, as companies need to borrow in order to address cash flow problems (Chart 5).  
Another structural factor often cited as a reason for inefficient allocation of resources is the country’s bankruptcy procedures: both too costly  
6
and too long , the Italian system does not appear to be efficient enough to support the rotation of assets – both financial and non-financial  
required for the performance of the NFC sector as a whole.  
What picture should we expect once the Covid-19 crisis is over? Direct government support, together with government-guaranteed loans,  
7
8
covered nearly two-thirds of liquidity requirements between July and December 2020 . The BIS believes that business failures will increase  
by an average of 13.5% in 2020-2021. This is a substantial rise, but lower than those expected in Spain (28.2%) and France (18.6%). Insolvency  
9
risks is also likely to affect small and mid-sized Italian companies disproportionately. According to these studies, the risk of a proliferation  
of zombie firms over the coming months is thus likely to be concentrated on SMEs.  
1
2
3
4
5
6
7
8
9
Fabiano Schivardi, Enrico Sette and Guido Tabellini, Credit misallocation during the European financial crisis, Banca de Italia, Working paper n°1139, November 2017  
See footnote 16  
Gopinath et al (2017), Capital Allocation and Productivity in South Europe, Quarterly Journal of Economics  
World Bank data  
Financial stability report, Box: the impact of the pandemic on the riskiness of firms, Bank of Italy, November 2020  
Banerjee, Cornelli & Zakrajšek (October 2020), The outlook for business bankruptcies, BIS bulletin  
E. Carletti et al The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy, Center for Economic Policy Research, June 2020  
BOX 3  
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2
SPAIN: GOVERNMENT SUPPORT AND RISING ZOMBIFICATION: IS THERE A DIRECT LINK?  
Given the substantial economic shock suffered by Spain in 2020, the country may be, more than elsewhere, facing a difficult balancing act  
between protecting employment and the risk of fuelling zombification. Various estimates prior to the Covid-19 crisis were already showing a  
relatively high proportion of zombie firms in Spain, compared to France and Germany. The OECD (2017) estimated that 10% of Spanish NFCs  
1
2
could be classified as zombies in 2013 . The BIS provide higher estimates for 2017 – around 14% – although this figure was falling slightly,  
down from above 15% in previous years.  
The introduction of the ERTE short-time working scheme – together with a drastic tightening of company liquidation conditions from the  
3
very onset of the pandemic – allowed employment to withstand the economic shock in 2020, but it also increased fears that the number  
of zombie firms would rise sharply. The number of corporate bankruptcies fell sharply in the second quarter of 2020, before, admittedly,  
recovering in the second half of last year (Chart A).  
SPAIN: NUMBER OF BUSINESS FAILURES  
y/y, %  
60  
50  
40  
30  
20  
10  
0
-
-
-
-
-
10  
20  
30  
40  
50  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
SOURCE: REFINITIV, INE  
CHART A  
That said, it would be wrong to draw a direct link between a reduction in bankruptcies and an increase in zombie firms. Companies in financial  
difficulties during the crisis may well recover once the health crisis is over and the shocks on demand and supply have eased. According to  
the Bank of Spain, between 2019 and 2020, the share of insolvent companies increased – depending on the hypotheses used – by between  
4
4
and 8 percentage points, relative to their 2019 level . Among these insolvent firms, the Bank’s central scenario estimates that more than  
5
half are viable, meaning that despite their current difficulties, these companies have the prospect of a return to profit over the long term.  
This ‘viability ratio’ is even higher when the reference indicator is employment, and more still when it is indebtedness. These results would  
suggest that the increase in zombie firms as a result of the Covid-19 crisis will be relatively limited. In this case, the possible failure of these  
firms would be comparatively worse for the economy as a whole than the risk of zombification as the result of state support to businesses.  
Government-guaranteed loans have played a key role in dampening the effects of dwindling cash positions at many companies. These loans  
covered nearly three-quarters of the cash needs of Spanish NFCs between April and December 2020.6  
The Bank of Spain observe other indicators, including the net profitability rates of NFCs. Here again, the findings need to be interpreted with  
care. The median profitability rate would fall by 4 percentage points relative to 2019. However, half of NFCs maintained a positive return  
on net assets. Beyond the impact of the crisis, a key aspect emerging from this report is the dispersion of profitability across sectors, which  
is closely linked to activity levels in each of these sectors. Unsurprisingly, median profitability dropped into negative territory in hotels and  
restaurants, but also in the automotive sector and, to a lesser extent, in transport. For other sectors (manufacturing, construction, retail,  
and ‘other’ services), profitability remained positive. This report suggests, therefore, a need to target support for business in a more limited  
number of sectors, rather than of broad-brush support across all areas of the economy.  
BOX 4  
1
2
3
McGowan et al (2017), The walking dead? Zombie firms and productivity performance in OECD countries, OECD working papers  
R. Banerjee et al, Corporate Zombies: Anatomy and life cycle, BIS Working Papers, September 2020  
The government introduced a decree on 28 April 2020 which suspended bankruptcy procedures during the health emergency, and this measure is currently expected to remain in place  
until 9 May 2021.  
4
See El Impacto de la crisis del Covid-19 sobre la situacion financiera de las empresas no financieras en 2020: evidencia basada en la central de balances, Bank of Spain Economic  
Bulletin, December 2020  
5
6
The Bank of Spain’s central scenario assumes long-term earnings prospects in 2020 identical to those in 2019.  
R. Blanco et al, Spanish non-financial corporations’ liquidity needs and solvency after the Covid-19 shock, Occasional Document, Bank of Spain, November 2020  
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