Invasion of the zombies: Europe’s banks stagger

Weak institutions, bad debt leave economy in no-growth nightmare.

The walking dead are gnawing at Europe’s weak economy zombie banks and zombie companies.

Almost a decade after the financial crisis that ravaged the global economy, analysts and top officials are warning that too many banks in Europe are struggling financially, keeping them from lending to companies and fostering growth.

Calls to fix the problem have come repeatedly from the International Monetary Fund, U.S. Treasury Secretary Jack Lew, and European Central Bank chief Mario Draghi. They say something has to be done if Europe’s economy is to gain more traction and bring down unemployment.

Here is a look at Europe’s banking crisis and how it hurts the economy.

Bad loans

Soured loans are one of the biggest problems, especially in Italy.

They create a vicious cycle: the slow economy means businesses can’t repay their loans. That leaves the banks short of cash to finance new business ventures, which holds back the economy even more.

Getting rid of the bad loans is a struggle. Italy’s Monte dei Paschi is trying to offload 27.7 billion euros ($31 billion) in such loans to investors who would buy them at a deep discount. The bank has to get rid of those problem assets before it can credibly ask investors for more money — up to 5 billion euros through a share offering.

In Italy, one reason clearing bad loans can be difficult is that the courts are clogged, meaning it can take years to pursue the debtors and recover money. That makes the assets worth even less, and the lower the price, the bigger the financial hole the bank has to fill.

Zombie companies

Banks under financial pressure, meanwhile, tend to prop up “zombie” companies by extending loans rather than pressing for repayment.