An overarching financial cycle is spawning corporate zombies

Firms caught up in the cycle do not have enough profits to cover interest payments on their debt

Yan Barcelo 19 March, 2019 | 5:00PM
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An increasing number of economists and market participants fear the huge debt overhang – and the spawning of zombie companies – that monetary policies have produced in the last decade.

The prevalent view among academic economists focuses on the business cycle, to which the credit cycle is an appendix. “The credit cycle is just part of the business cycle,” asserts Angelo Melino, professor of economics at the University of Toronto, reflecting mainstream views. “It is only one of many shocks that can happen to the business cycle.”

At the C.D. Howe Institute, Associate Director Jeremy Kronick reflects a similar perspective when he says, “It’s hard to evaluate the typical economic indicators. Yes, debt might be high, but then, cash flow or asset value could also be better. After all, the Bank of Canada has increased rates five times since July 2017, and markets have survived; there has been no debt collapse.”

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About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, writing for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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