Nov 21, 2022

Europe Has a Debt Habit

Zombie companies now make up 20% of all European businesses, up from 11% in 2008.

Zombie companies now make up 20% of all European businesses, up from 11% in 2008.

Not dying because they can pay their bills, but unable to grow because they can barely pay their bills, the term zombie company was first applied to Japanese companies in the 1990’s after the Japanese asset bubble popped in the late 80’s.

This period in the 1990’s is also known as Japan’s “Lost Decade”. A lost decade that has turned into a stagnant quarter century, 25 years on and Japan’s stock market is still 50% off it’s all time high.

Nikkei Stock Index 1974-November 2022
Nikkei Stock Index 1974-November 2022

Propped up by low interest and a “too big to fail” mentality, companies that otherwise would have gone bankrupt zombie on, taking up space in an economy where a new, more efficient company or idea could have taken over.

These “zombie” companies are unable to make enough in profit to pay down their debt and because of that banks won’t lend them excess capital that might help them grow their way out of that situation.

Similar to if someone pays off just enough on their credit card every month that they have enough room to spend on it the next month—the only difference between a person and a company though? European companies have been able to keep maxing out their debt, their credit cards, at extremely low interest rates.

So why wouldn’t they keep doing it? It’s free money.

Like a coke head that has all the charisma in the world when they’re railing lines, the problem isn’t in the moments when they’re on coke. It’s in the moments when they can’t be on coke. And no one can be on coke all the time.

Same with interest rates, history has shown us time and again that rates cannot remain at or near zero forever. When they are it’s like coke for the economy and 20% of European companies are now complete addicts.

The longer interest rates remain too low the worse things tend to get. Because when rates do inevitably need to rise—like they do to help tame inflation—there are so many companies with so many employees tangled in this low interest treadmill that policymakers feel they can’t possibly let interest rates rise to the point that these companies go bankrupt… so we do some ridiculous artificial bullshit like infinite quantitative easing to keep rates low and the zombies zombie on.

And rates do need to rise in Europe to tame inflation. While inflation in the US may have found a place to pause, that just hasn’t been the case in Europe. The UK, Germany, Italy, Austria, Sweden, Portugal, Denmark, Iceland, Finland, and on all continue to report increasing inflation readings. The majority of these are over 10% and rising.

If time is money, then the price of money can not be free. Yet in Europe, the European Central Bank kept interest rates negative from 2015 until just this past summer. Yes negative interest rates.

ECB interest rates 1999-2023
ECB interest rates 1999-2023

Europe has a debt habit that it can’t shake.

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