We’ve seen this movie before: Zombies stalk the land, threatening to infect those around them and ... impairing economic growth. Maybe that doesn’t seem as scary as The Walking Dead, but the threat of zombies — companies that struggle to service their debt or banks that are technically insolvent but avoid collapse — is real. Their rise has been tied to the era of easy money that the US Federal Reserve and other central banks ended last year when they rapidly raised interest rates. Now, tighter money threatens to create new zombies and kill off others that had been barely holding on. Central bankers face tricky balancing acts as they try to cool inflation without swelling the ranks of the financially undead.
- What are financial zombies? A zombie firm typically refers to a company that doesn’t earn enough to pay its interest costs for an extended period. In financial statements, that’s reflected as an interest coverage ratio of under one. Ricardo Caballero, an economics professor at the Massachusetts Institute of Technology, used the word in 2008 to analyze Japan’s lost decade of the 1990s. Then it gained more popularity in the US during and after the global financial crisis. But the term was originally coined by Edward Kane of Boston College in the late 1980s to describe banks that were allowed to stay in business even though they were essentially wiped out by commercial-mortgage losses. Whether it’s a company zombie or a bank zombie, the basic concept is the same: They are allowed to keep walking in the hope that life may return to them someday.