Benefits for the Greek economy from resolving bad loans and zombie firms

Abstract

We examine the type and magnitude of negative externalities stemming from “zombie” firms in the Greek economy, focusing on investment, employment and productivity. For this purpose, we use a panel dataset of Greek firms broken down by size and sector of economic activity for the period 2002-2021. A descriptive analysis reveals a high positive correlation in the trends between non-performing business loans and the number of zombie companies in the Greek economy over the last twenty years. Through quantitative analysis, significant direct and indirect effects emerge from the degree of density of zombie firms at the total economy and sectoral levels. First, healthy firms outperform zombie firms in terms of investment growth, employment growth and productivity levels. Second, a high concentration of capital in zombie firms negatively affects the rate of investment growth of healthy firms in specific sectors of economic activity. Third, a high concentration of capital in zombie firms forces healthy firms to increase their overall productivity in order to survive. Fourth, a high concentration of capital in zombie firms prevents the reallocation of capital to more productive investments across firms and sectors of activity. Finally, younger and larger companies generally perform better in terms of investment and employment growth, and productivity levels. Overall, a faster resolution of zombie firms and non-performing corporate loans, both on and off bank balance sheets, allows a more efficient allocation of resources and can boost investment, employment and growth rates in the Greek economy in the medium to long term.