Central Bank report on zombie firms, bottlenecks, and credit renewal

The Central Bank of the Republic of Turkey examined the spillover effects of zombie firms in Turkey using a comprehensive dataset that includes firm-level balance sheets, inter-firm sales, employment, and firm-bank level credit records.

According to the report, empirical analyses based on practical knowledge rather than research findings point to four key findings.

Analyses conducted using firm-bank level matched credit data showed that there is a motive for continuous credit renewal toward zombie firms, and this situation causes inefficiencies in credit allocation.   

Based on average values, zombie firms, which are less productive than non-zombie firms, hinder investment and employment opportunities in healthy firms.

Detailed analyses using inter-firm trade data revealed that healthy firms with more zombie firm connections in their supplier or customer networks exhibit lower sales, investment, and employment.  

Finally, it was determined that being in a more intensive network connection with zombie firms leads to significant declines in value-added, productivity, and profit margins.  

WHAT IS A ZOMBIE COMPANY?

The term "zombie" was first used in the 1980s.

The name who coined the term was Edward Kane from Boston College, referring to banks whose capital had dropped to zero but which nevertheless continued to exist. 

Subsequently, in 2006, MIT economics professor Ricardo Caballero used this term to describe Japan's economic slowdown that began in the 1990s and lasted for a decade, explaining how large Japanese banks, which were actually in distress, threatened the economy because regulatory authorities kept capital standards loose.

At that time, the capital of Japanese banks was eroding, yet the banks continued to lend even to debtor companies that could not pay their existing loans, and they were restructuring their current loans. The debt, whose life was extended so that the bank would not record a loss, and the company owning that debt continued to survive. 

WHAT IS THE IMPACT OF ZOMBIE COMPANIES ON THE ECONOMY?

Zombie companies have various negative effects on the economic system.

They can negatively affect the competitiveness of other healthy corporate structures. They can cause misallocation of resources.

Furthermore, the bankruptcy of zombie companies brings financial losses and unemployment problems. Economic stability is harmed.

The continued operation of zombie companies leads to market inefficiency. While this situation harms the competitive economic system, it also makes it impossible for companies that cannot generate capital to survive in the long run. Additionally, such companies cause losses in state tax revenues and prevent the efficient use of public resources.

Keeping uncompetitive companies afloat in the market through artificial support further weakens the economy by directly leading to a decrease in tax revenues and the diversion of state resources to ineffective areas. 

Here is the Central Bank's report prepared on zombie companies the original text of the communique

News Source: 12punto