In Germany, there are more and more so-called zombie companies that can eventually undermine the economy for many years to come. Thousands of such businesses are unable to cover their debt service costs at the expense of profits, writes the Financial Times.
Under a government decree introduced in March, German companies affected by the pandemic are not required to file for bankruptcy. The Minister of justice Christine Lambrecht wants to extend this decision until March of next year. However, many economists believe that it is better to let such firms close than to keep them on artificial life support.
The government of Europe’s largest economy is spending billions on job-saving programs, cheap loans to companies, and rehabilitation of large firms facing bankruptcy. It is estimated that about 550 thousand German companies (one in six) are at risk of becoming “zombies”.
Experts fear that this could destroy confidence in the market. The company will continue to expect that their company really is insolvent. The extension of the decree will simply postpone the wave of bankruptcies that the country will inevitably face, experts believe.
The German economy shrank 10.1 percent in the April-June quarter from the previous quarter, the worst fall since 1970. Unemployment remained at 6.4 percent in July.