The Risk of the Bailout of Everything

At the same time that we see the largest fiscal and monetary support plan since World War II, we are witnessing two dangerous collateral effects: the rise of zombie companies and the collapse of small businesses and start-ups.

By Daniel Lacalle and cross-posted from his personal blog.

Despite massive government and central bank stimuli, the global economy is seeing a concerning rise in defaults and delinquencies. The main central banks’ balance sheets (the Federal Reserve, Bank of Japan, European Central Bank, Bank of England and People’s Bank Of China) have soared to a combined $20 trillion, while the fiscal easing announcements in the major economies exceed 7% of the world’s GDP, according to Fitch Ratings. This is the biggest combined stimulus plan in history. However, businesses are closing at a record pace and unemployment has reached extremely elevated levels in many countries.

There is an important risk in what I call the “bailout of everything”, or the conscious decision from governments and central banks to provide any needed support to all sectors and companies with access to debt. Most of these stimulus packages and liquidity measures are aimed at supporting current government spending and providing liquidity to companies with assets, access to debt and in traditional sectors. It is not a surprise, then, that at the same time as we see the largest fiscal and monetary support plan since World War II, we are already witnessing two dangerous collateral effects. The rise of zombie companies and the collapse of small businesses and start-ups.

According to the Institute of International Finance (IIF), the figure of global corporate bond defaults has risen to $50 billion in the second quarter of 2020 despite historic-low interest rates and high liquidity. Additionally, according to Deutsche Bank and the Bank of International Settlements, the number of zombie companies in the eurozone and the US, large companies that cannot cover their interest expense costs with operating profits, has rocketed to new all-time highs. According to professors Petroulakis (ECB) and Andrews (OECD) “Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others” (What zombie firms tell us about Europe’s productivity problem” World Economic Forum, April 2019). This problem is only increasing in the current crisis

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