August 6, 2024
In theory, low interest rates are supposed to stimulate the economy. But in practice, companies abuse them.
For example, during much of the low-rate period from 2008-22, many businesses collected as much cheap credit as possible. This created a bubble of corporate zombies:
The U.S. recently saw a huge debt refinancing wave for individuals and businesses. Companies borrowed more than $600 billion in the first quarter, the most in three decades, and largely managed to delay corporate debt deadlines.
But not everybody got so lucky.
Mostly small and mid-sized businesses turn to banks for refinancing rather than the public markets. Banks weren’t as willing to lend as bond investors this year, so their rates have been several percentage points higher than the federal funds rate.
As a result, many companies that borrowed from banks are operating from one debt payment to the next. The stubbornly high interest rates are not helping.
Corporate debt levels are rising, and not just in America. “Walking dead” businesses are spreading and that’s worrisome.
In the U.S., business debt was around 50% of gross domestic product (GDP) in the 1980s. It reached 80% last year.
Japanese corporate debt is up to 115% of GDP. In France, it’s above 150%, the highest of any major nation. And of the nearly 2,000 Canadian companies with public data, 1,250 are zombies (62.5%).
Oddly, we can’t let them go extinct. The Associated Press estimates these zombie companies provide jobs for 130 million people worldwide.
If they went bankrupt simultaneously, the unemployment rate could skyrocket. That’s not a situation any country wants. It would be disastrous for the global economy.