Decision makers should move quickly to repair the euro zone's ailing banking system to avert a Japanese-style lost decade of minimal growth and inflation, a European Central Bank study said on Thursday.
"The risk is the emergence of a situation of the type experienced in Japan during its 'lost decade'," the study said.
"Fragile banks have an incentive to continue financing troubled and inefficient firms, so as to avoid recognising further losses."
The unwinding process can become a long-lasting drag on the economy, the research paper said.
"In this constant balancing act, policy interventions should, therefore, avoid delaying the necessary adjustment process."
Once banks' balance sheets have been cleaned, corporate defaults might have a much smaller impact on the economy, it said.