Zombie companies: Pushed by central banks all over the world

As long as interests rates stay near zero banks can avoid restructuring or force the zombie companies into liquidation. They manage to stay afloat because they can manage interest payments but cannot reduce the principal

After the bubble burst in January 1990, the Japanese lowered interest rates. Many companies that should have gone bust continued to operate. These companies were able to stay afloat because they had access to bank loans at cheaper interest rates than the risks warranted; in effect they received subsidized credit. At one level this program worked quite well. The companies that received this credit ended up losing fewer jobs than other companies which were left to market forces. So from a policy standpoint, the low interest rates appeared to be a great success by reducing the pain. But there was one problem.


The lowered interest rates created the dreaded zombie company. These are companies with just enough cash flow to service their debts at very low interest rates, but insufficient profit to invest and grow. They can’t innovate. They can’t expand. They can’t create more jobs. They just exist. They are now they are not just in Japan. They are everywhere.


Japanese zombie companies are still there. About two-thirds of Japanese firms do not earn a taxable profit. Over the past decade a quarter of the companies listed on the Tokyo Stock Exchange failed to achieve operating margins above 2%. Like the flu presently spreading throughout the US, zombie companies can infect entire industries. They keep productivity low, put off new entrants, keep workers in unproductive jobs and discourage investment by driving down prices. They are also hard to get rid of.


Global economy: Five reasons to fear the fall


As long as interests rates stay near zero banks can avoid restructuring or force the zombie companies into liquidation. As long as they have sufficient cash flow to service the loan, the loan does not have to be written off. All banks have to do is to extend the loan to avoid heavy losses. At long last even the governor of the Bank of Japan, Masaaki Shirakawa, has acknowledged that a policy of near zero interest rates hurts corporate growth.


Japan has often been the poster child for zombie companies, but now that all of the central banks have gotten into the loose money business, they have spread to Europe. During 2010 30% of English companies were losing money. Although this is a larger proportion than in the recession of 1990, the rate of insolvency was less. They manage to stay afloat because one in ten companies can manage interest payments but cannot reduce the principal. Companies in this category have increased by 10% in the last five months.


European countries have similar stories to England especially in the peripheral countries. During the 1990s recession Europe’s economy contracted by only 1% compared with 4% in the present recession. Yet the default rate for sub-investment grade debt was 67%. During the worst of the recession the default rate did not exceed 9%. It now stands at only 2.3%. One would expect that financially distressed countries like Greece, Spain and Italy would have the highest levels of insolvencies, but in 2011 they had the lowest even though only two-thirds of the companies were making a profit.


China bucks the slowdown but how?


Emerging markets are supposed to be the hot beds of growth rather than the preserve of marginal companies, but these economies are also infected with zombie companies. Most companies in India are fairly healthy despite the downturn but large capital intensive industries like telecoms, construction and infrastructure are loaded down with debt. The largest 80 listed firms increased their debt from $29 billion in 2007 to $163 billion today. The over-reliance on debt rather than equity is to some extent part of local conditions. Promoter groups made up of clans or individuals who control these companies dislike diluting their interests by issuing equity and instead rely on debt. Some of the money is readily available from public sector banks that hold up to 93% of the restructured loans. This especially true of the smaller pubic banks where 80% of these restructured loans reside.


Not to be outdone, China has its own huge state-owned banks that are propping up zombie state-owned companies with subsidized capital. Of the largest central enterprises more than two-thirds lost money in the first half of 2012, yet there is never any discussion of insolvency. Often the zombie company is owned by a local government which can keep it alive with cheap loans from local branches of large state-owned banks. The problem is that these local governments are heavily indebted. They borrowed 10.7 trillion yuan ($1.7 trillion) and after a brief slowdown have started again increasing their borrowing 148% since 2011.


Central bankers have insisted that their policies of ultra-lose money have been successful in preventing a more serious downturn. No doubt this is true, but treating symptoms is not a cure. In the process they have also managed to kill growth.


Other stories by William Gamble


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)


Companies tap retirees; competition experts in high demand

Those in high demand include government and regulatory officials with expertise in areas like competition law, investigations, security services and financial markets

New Delhi: India Inc seems to be tapping a new set of talent pool, the retired personnel who bring with them years of expertise for managerial and specialised roles, in sectors ranging from banking, energy and infrastructure to technology, reports PTI.


As per the human resources industry experts, those in high demand include government and regulatory officials with expertise in areas like competition law, investigations, security services and financial markets.


The growing demand for retired personnel at corporate organisations also comes at a time when the country's demographic profile is highly tilted towards the youth, but concerns are being raised about their employability.


In order to bridge the talent gap, organisations are recruiting retirees who want an active lifestyle and are eager to utilise their time and skills for a meaningful use so that they have post retirement financial security.


According to FLEXI Careers India, which works extensively in the area of diversity and inclusion, there are 2.6 million retirees in India who can be employed.


Explaining the reason behind hiring of these specialised section of people FLEXI Careers India AVP (Consulting Services) Karthik Ekambaram said, “They offer organisations luxury of a trained and experienced talent that can be used for operational, managerial and specialised roles.”


Companies from varied sectors such as banks, financial services, oil and gas, infrastructure, IT and ITES industries are hiring retired experts from areas like competition law, security and investigations, in addition to those having worked in their respective sectors.


HDFC Standard Life Insurance, Goldman Sachs, ICICI Bank, KEC International are among the companies having treaded this path.


Experts say that those having worked in areas like competition law are in higher demand, as there are very limited number of people with expertise in such areas.


The demand for retired personnel also helps these people resume their career on a new track.


For example, former chief of fair trade regulator Competition Commission of India (CCI), Vinod Dhall, started consulting practices through his own firm, Dhall Law Chambers, after his retirement.


Another notable example is that of Amitabh Kumar, the former Director General of Investigation, who is now working as a partner with J Sagar Associates.


Dhall, a former IAS officer, said that if ex-CCI persons enters into consultation, “then it becomes easy for the regulator to dispose of the application as they are aware of its requirement.”


BofA-ML sees diesel price hike adding 120 bps to inflation

According to BofA-ML India chief economist Indranil Sen Gupta, inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013

Mumbai: Bank of America-Merrill Lynch (BofA-ML) has said the recent partial diesel price hike will inflict a 1.20% burden on the already sticky inflation and that the price index will remain elevated throughout the next fiscal, reports PTI.


“The bottomline is that inflation will follow an inverted U in FY14, after last week’s diesel price hikes that will add 120 basis points (bps) to FY14 inflation.”


“Inflation should persist around 7% in the March quarter, which will then likely go back up to 7.5-8% in second half of 2013. But it should abate to 6.5-7% by March 2014,” BofA-ML India chief economist Indranil Sen Gupta said in a note.


However, the American brokerage said it continues to expect the Reserve Bank of India (RBI) to cut policy rates by 25 bps on 29th January. It is likely to be cut by 75 bps by June, then pause in the second half as inflation picks up and cut another 50 bps again in the March 2014 quarter as inflation subsides.


The government allowed oil marketing companies to increase the retail price of the fuel by 50 paise per every month and ended subsidy on bulk and institutional diesel consumers like railways, state road transport corporations and to power plants. The current subsidy on diesel stands at Rs 9.50 to a litre.


Gupta said, “We expect inflation to persist at 7%-7.5% in the March quarter after the diesel price hike. And accordingly we hike our March 2013 inflation forecast to 7.3% from 7.1%.”


On the impact of the staggered diesel price hike, it said the move will add about 120 bps to FY14 inflation if crude remains at $110 per barrel.


However, on the positive side, Gupta said, the price hike will help the government trim its oil subsidy by Rs20,000 crore to Rs67,300 crore (assuming a rupee value of 54 to the dollar).


Stating that the long tightening by the RBI has begun to turn counter-productive, he said “We cannot deny that the RBI tightening is increasingly turning counter-productive in hurting growth rather than denting an inflation that is largely ‘imported’.”


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