Halloween was a few days ago, so perhaps it’s a bit late to be talking about zombies. But as reported by the New York Times, the walking dead have been gnawing at Europe’s persistently weak economy – by that one is referring to both zombie banks and zombie companies. Here’s what this means.
Bad loans are a big problem in Europe. Companies continue to have difficulty paying back their loans because the economy is weak. European banks could simply cut their ties to these companies, but a group of economists has found that banks under stress tend to maintain credit to companies with which they already have a relationship.
Pulling credit from such companies would mean recognizing the bank’s own losses on the loans. However, by not pulling credit from these struggling companies, there’s less financial capital available to business that could expand if money were made available to them.
The result is that the European economy is stifled by a group of zombie financial institutions, including in stronger European economies like Germany and Austria. This may help explain why the economy of the nine Eurozone nations barely expanded during this past summer and why unemployment there remains above ten percent.
