Swiss Re warns of zombie companies

The financial crisis in 2008 triggered a glut of liquidity. At the start, the proportion of companies with insufficient cash was 11 percent. Now it is twice as high, warn Swiss Re experts.

Bankruptcies (here a business in Oldenburg) are important so that the economy can renew itself with fresh ideas.

Dhe reinsurer Swiss Re warns of the consequences of “zombifying” companies. Chief economist Jérôme Haegeli describes the fact that, without special effects such as the low interest rate policy and new insolvency rules in the corona pandemic, they are not generating enough profits to stand on their own two feet as a “ticking time bomb”.

“Covid-19 has shown that the best risk strategy is to be prepared before a shock event and to build up financial buffers in order to be resilient,” he told the FAZ in a video interview.

Based on its own research, Swiss Re predicted two years ago that the German economy would be less resilient. Because of the extraordinarily expansive monetary policy and government interventions, the past ten years have been a phase of creeping death for many companies that could only raise enough funds to counter this because of the low interest rates. As a reinsurer that pays corporate claims internationally, Swiss Re has an interest in a productive economy.

An orderly withdrawal of the state is necessary

“Now we need an orderly withdrawal of the state: companies that have to go bankrupt should go bankrupt,” said Haegeli. It is completely paradoxical that the number of bankruptcies in Germany, France and Great Britain fell during the Corona crisis of all places. According to market data, the number of companies that can be classified as zombie companies based on their operating cash flow was 21 percent in 2020.

The Swiss Re headquarters in Zurich are considering an exit from the expansive monetary and fiscal policy.
The Swiss Re headquarters in Zurich are considering an exit from the expansive monetary and fiscal policy.: Image: Reuters

In the financial crisis year 2008, only every ninth company fell into this category, and in the nineties the proportion was only 3.5 percent. And the Bank for International Settlements had warned that the zombification in Europe was already greater than in Japan at the beginning of this development. “The negative interest rates are a ticking time bomb that we have to take notice,” said Haegeli. “Unproductive companies don’t create jobs.”

Reinsurers have been warning of the consequences of low interest rates for many years – not entirely unselfishly, since as large investors they themselves suffer from the poor conditions for capital investments. At the same time, they see their ideas about regulatory policy violated. “The end of the Covid crisis must go hand in hand with an exit by the state,” he said. “We have little productive growth, as if you were driving with broken cylinders.”

There is no real capital markets union in Europe. “Every country in the euro area has its own insolvency regime,” criticized Swiss Re. Chapter 11 procedures in the United States worked better, and non-resilient companies would be taken out of the market more quickly. “Only when something comes in can something grow again,” he said. A wave of bankruptcies and market dynamics made progress possible.