A financial zombie company is a company that doesn’t generate enough money to remain solvent. For example, a battery manufacturer might have made an investment in a new energy source that outperforms existing alternatives, but the battery still isn’t ready for the market. While the company has some products on the market, the income they generate is only enough to cover their debt obligations.
A financial zombie is not a good thing. It can drag down the economy for years. It can lead to mass layoffs, and significant losses for investors. Worse yet, it could herald a new recession that could make recovery more difficult. However, the upside is that it could also create new business opportunities.
Financial zombies are easy to identify. You can tell them apart by their language and tone. Many MBA money managers are able to speak in complete sentences, but they speak like the zombies in B-movies. You can tell if a financial zombie is using one of these five phrases. Don’t be afraid to tell your financial advisor or broker everything you know about your financial situation.
In the past, economists have warned of the risks of zombie firms. These companies have high debt levels and can’t generate enough cash to pay back their debt. As a result, they are less able to invest in new products or services. In addition, zombie companies are prone to failing in a recession.
A well-capitalised banking sector reduces the risk of financial zombies by lowering the cost of borrowing. It also reduces the risk of lending to zombies. However, regulating the amount of capital banks must hold will not prevent zombie lending entirely. In other words, regulating banks can only force them to raise more capital if they are not profitable.
In addition to the risk of financial zombies, rising interest rates have created an environment wherein unprofitable firms have been unable to earn a profit. Rising interest rates may finally put an end to the era of zombie companies. Rising interest rates force unprofitable companies to burn cash. This will help the economy and will teach younger investors about the importance of risk management.
The term “financial zombie” is often used to refer to an insolvent financial institution. The term originated during the savings and loan crisis. In the late 1980s, a number of savings and loan institutions faced bankruptcy. However, despite the risk, policymakers kept many of them afloat to prevent panic from spreading to healthier banks. However, restoring zombie banks to health can cost hundreds of billions of dollars and weigh on economic growth.