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Do we want these two to tango? On zombie firms and stressed banks in Europe

Manuela Storz, Michael Koetter, Ralph Setzer () and Andreas Westphal

No 13/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that 'zombie' firms generally continued to lever up during the 2010-2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

Keywords: zombie lending; debt overhang; bank stress (search for similar items in EconPapers)
JEL-codes: E44 G21 G32 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mac
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