Zombie firms on the march as rate hikes near

Global macro outlook upbeat despite subdued inflation

ZURICH, Sept 17, (AFP): International markets have been buoyant in recent months as easy money policies won an additional reprieve, but a rise in socalled zombie firms shows a rise in interest rates could turn into a nightmare.

In its latest quarterly economic report, the Bank for International Settlements (BIS) said Sunday that the shift in outlook in monetary policy along with low inflation and economic expansion helped investors adopt a “risk-on” approach.

As investors took on risk by buying equities, markets soared to record highs.

“Despite subdued inflation in advanced economies, the global macro outlook was upbeat” as early data pointed to continued economic expansion in advanced economies, said the report.

“Market commentators label such an environment the Goldilocks scenario — where the economy is ‘not too hot, not too United States.

The author of one article in the BIS report, Claudio Borio, warned of a debt trap.

“Debt service ratios, for instance, are only so low because interest rates have been falling so much,” he said.

“There is a certain circularity in all this that points to the risk of a debt trap: the protracted decline in interest rates to unusually low levels, regardless of the strength of the underlying economy, creates the conditions that complicate their subsequent return to more normal levels.

Borio noted that US corporate debt is now considerably higher than it was pre-crisis, and that global debt levels in relation to GDP have continued to rise despite the financial crisis as countries borrowed to prop up economic activity.

“Against this backdrop, the increase in the percentage of ... ‘zombie’ firms — does not bode well,” he said.