Government loan guarantee programs can have unintended consequences, such as financing economically unviable companies, referred to in the literature as zombie firms. The process of zombification of the economy is an artificial support of unprofitable companies either through state programs, or through bank loans and/or keeping interest rates at a very low level, the National Bank notes.

This process can occur especially during periods of economic recession or crises and is associated with medium and long-term decline in productivity and fragility of the financial sector.

On the one hand, zombie firms have low productivity and low resilience to shocks. On the other hand, the development of the segment of zombie companies may be accompanied by crowding-out phenomena from the credit market of performing companies and violation of competitive mechanisms.

These effects are more pronounced if policies to support unviable firms are maintained for longer periods of time, say the authors of the cited report.

In Romania, the segment of zombie companies began to develop after the international financial crisis of 2007-2008. Although these developments were similar to those observed at the European level, the much larger scale of this phenomenon in the case of Romania was determined by the difficulties faced by companies during debt restructuring and/or exit from the market, as well as weak payment discipline, which contributed to fiscal optimization behavior .

These companies have a high degree of transmission of shocks in the economy, have a high degree of indebtedness (debt/asset ratio 2.4 times higher than the average for the economy) and have a low level of liquidity.

European context

At the European level, the segment of zombie companies registered an important growth after the international financial crisis of 2007-2008 and the sovereign debt crisis of the Eurozone. This dynamic was later reversed, and in 2019 the values ​​returned to the 2007 level.

In contrast to the segment of zombie companies, at the European level, the phenomenon of bankruptcy increased, with the indicator for the application of the bankruptcy procedure increasing in the second quarter of 2023 to the highest level since 2015.

Lower-than-expected economic development, rising costs against the background of the energy crisis and the war in Ukraine, an increase in interest rates due to persistent inflation (the ECB monetary policy rate increased from 0 percent in June 2022 to 4.5 percent in September 2023) created additional pressure on the financial the situation of companies, many of which are facing difficulties.

For example, in Hungary and the Netherlands, growth was significant (more than 50 percent on average in the first two quarters of 2023 compared to the same period last year), while in Denmark and Bulgaria, bankruptcies decreased by more than 15 percent on average over the same period. .

The national context is zombie companies

In Romania, the segment of zombie companies is important. The sector’s share fluctuated between 2.6 percent before the 2007-2008 financial crisis and 10.2 percent in 2010, returning to 3.1 percent in 2022.

The rapid development of the segment of zombie companies also affected the domestic financial sector, causing losses and limiting its ability to issue new loans to non-financial companies. In 2010, a fifth of loans granted to non-financial companies belonged to zombie firms, most of which were provided by banks (more than 80%), especially in foreign currency (about 80%).

Currently, zombie financing provided by Romanian financial institutions represents less than 5 percent of total credit, and the default rate of this portfolio is 2.8 percent (August 2023).

Zombie companies have extremely low levels of capitalization, being financed in the form of loans by shareholders and/or companies in the group or affiliates. The importance of this type of financing has increased significantly in recent years, from 25 percent of total debt in 2010 to 42 percent in 2022. The predominant use of financial resources of a debt nature, obtained especially from shareholders or subsidiaries, can also indicate a possible fiscal optimization of behavior, because this type of financing allows the distribution of income, not taxed even under conditions when companies do not make a profit.

External funding is also an important source of funding for zombie companies. Contracting of loans from member companies of the group or other non-resident companies was mostly carried out at higher interest rates than foreign currency loans provided by domestic banks, which could indicate a possible mechanism of transfer of income to the group.

Zombie companies are almost entirely with Romanian capital

A large number of companies that experienced significant financial difficulties in the period after the financial crisis of 2007-2008 did not recover, but they did not leave the market either. A third of the companies identified as zombie firms in 2022 have been in this state for more than 10 years. Only a small part of zombie firms is liquidated or goes for reorganization.

Of the companies with significant undercapitalization between 2007 and 2014, only 11.6 percent were written off over the next five years. The use of the bankruptcy procedure is also very low.

Zombie companies are almost entirely owned by Romanian capital (93 percent of companies have majority Romanian capital). These companies show low productivity and contribute to maintaining a low level of discipline in the economy, being responsible for 15 percent of outstanding payments in the economy, 14.5 percent of arrears to the budget and having twice the payment period of suppliers compared to the average for the sector.

The long period during which a significantly undercapitalized company can continue to operate, as well as the low level of recourse to bankruptcy procedures or other restructuring mechanisms when the company experiences significant financial problems, indicate weaknesses in the exit mechanisms of non-viable firms. and weak payment discipline in the economy.