Monday, June 4, 2012

E&Y says 'zombie' companies holding back UK economy

The Telegraph reported that 'zombie' companies are holding back the UK economy according to E&Y.

Regular readers know that zombie companies are the direct result of policymakers and financial regulators adopting the Japanese model for handling a bank solvency led financial crisis.  Under the Japanese model, bank book capital levels are protected.

E&Y highlights several negative consequences for the real economy that have occurred as a result of protecting bank book capital levels.

Britain's recovery is being held back by a wave of "zombie" companies that should be allowed to fail but are instead undermining capitalism, according to Ernst & Young. 
The accountant said that the financial crisis had created an environment where it is "too difficult to fail", with businesses being kept afloat to the detriment of the broader economy. 
As a result, so-called "financially undead" companies are clinging on, despite the recession, making markets and the economy inefficient. 
"The expected jump in the number of companies falling into administration has not materialised," a report by E&Y said. ...
E&Y said that although companies are struggling, the number of administrations actually fell last year, despite a 42pc rise in profit warnings among listed companies. It said the mismatch could be explained by a change in attitude among the government and creditors, which have allowed more breathing space for businesses since the onset of the crisis. 
"[Banks] do not want to be seen to be pulling the financial rug from underneath companies that are facing difficult trading conditions," the accountant said.
Actually, this reflects bank capital preservation as not pulling the rug out from underneath financially undead companies saves the banks from recognizes the loss on their exposures.

Bankers are all for this as the resulting "higher" earnings translate into bigger bonuses.
Alan Hudson, E&Y head of restructuring in the UK, said while zombie companies were still operating, they were taking market share from viable companies that should be growing and boosting the economy. 
"The whole thing grinds along very slowly," he said. "It is a very unsatisfactory environment that has become so during the crisis which began in 2007-08."
When the Japanese model was adopted and banks were allowed to hide their losses under regulatory forbearance.
E&Y argues that because lenders continue to fund these businesses, capital is not being recycled and reinvested as it should be. 
Although it said the number of zombie companies was difficult to estimate, R3, the business distress specialists, said around 30pc of companies are regularly reliant on their maximum overdraft facility – a good gauge of whether a company is viable. 
"Insolvency is becoming such a difficult thing to carry off that well-advised borrowers are now in a stronger position than they used to be. They know they can push their banks further," said Alan Bloom, head of global restructuring at R3.
Here is confirmation that zombie companies have better access to loans than do creditworthy companies.
"Everything is becoming complicated and making insolvency a difficult option. 
"It means that businesses which probably should fail, don't fail. In a capitalist economy you get winners and losers," he said.

No comments: