February 03
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The European Bank for Reconstruction and Development urged its region's governments to review their support measures for companies in the wake of COVID-19, warning that supporting "zombie firms" could have a domino effect on healthy businesses, Reuters reports.

While corporate debt has hit record levels in about 40 of the EBRD's countries of operation, defaults in many countries have fallen to record lows, according to the annual "Transition Report 2022/23."

The EBRD, which covers countries stretching from Kazakhstan to Hungary to Tunisia, argued that some companies avoided default thanks to access to cheap credit thanks to government measures following the pandemic and war in Ukraine. But continued support is no longer sustainable in the face of high interest rates, the EBRD said.

“We still haven’t seen the fallout from the pandemic and the war in terms of bankruptcies. Actually, bankruptcies in the new EU member states are down,” Beata Javorcik, the EBRD’s chief economist, told Reuters. “There is a risk of zombification if emergency measures from governments are extended for much longer.”

The EBRD warned that the presence of "zombie firms" in the economy creates negative side effects for healthy firms, which have reduced investment, income and employment.

The report shows that subsidized credit to firms with negative cash flows has been made available through temporary payment deferrals, contractual reductions in outstanding amounts, emergency subsidies, and central bank liquidity injections. Many countries have also suspended - at least temporarily - the obligation to file for insolvency.

Any termination of state credit guarantees and subsidies should be gradual to avoid any shocks, and "should be fine-tuned so that only solvent and viable firms with temporary liquidity problems receive financial assistance.

The EBRD found that the problem is more acute in countries where state-owned companies and banks dominate: 13% of state enterprises in the 12-country sample used for the study can be classified as zombie firms, compared to 9% of private enterprises.

The EBRD report also showed mixed progress in reforming countries in six key areas, from competitiveness and sustainability to governance practices.

Central Europe, the Baltic states, and Southeast Europe mostly saw gains, while the southern and eastern Mediterranean economies mostly suffered declines. “Governance scores have deteriorated in many economies in the EBRD regions, driven mainly by the perceived worsening of corruption and a reduction in the freedom of the press,” the report added.

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