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Zombies could cause spooky ‘lost decade’ in UK

Monday, 18 Nov 2013 | 5:46 AM ET
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A new generation of zombie companies is lurching around, causing trouble and potentially causing a "lost decade" of low growth in the U.K., a leading think tank has warned.

Killing off zombie firms, which are able to pay off the interest on their debts but have liabilities far exceeding their assets, or restructuring them, could help a stronger recovery emerge, according to The Trading Dead: The zombie firms plaguing Britain's economy, and what to do about them. The report by the Adam Smith Institute, sponsored by business recovery specialist OpCapita, claims that there are over 100,000 zombie companies in the U.K. at the moment. Record low interest rates are helping them to keep going.

(Read more: Is it time to kill off UK's zombie companies?)

It also makes a direct link between the number of such companies and low productivity in the economy as a whole.

"Economically, zombies are quite real and hugely damaging, and governments and entrepreneurs cannot simply walk away," Tom Papworth, senior fellow of the Adam Smith Institute, said.

"Zombie firms stop workers and money being redeployed to more productive uses, they prevent new, better firms entering the market, they undermine competitiveness, reduce productivity and slow the growth of the whole economy. Low interest rates and bank forbearance represent a vast and badly targeted attempt to avoid dealing with the recession. Rather than solving our current crisis, they risk dooming the UK to a decade of stagnation."

Worries about "zombie capitalism" have led to some making unflattering parallels between the U.K. and Japan in the late twentieth century. In Japan, "evergreening" in the late 1990s helped create some of the low-growth corporates which are still hanging around today, but not growing very quickly.

There are also concerns that banks may have too much capital tied up with lending to such companies, and may be discouraged from lending to newer, more viable enterprises as a result.

(Read more: The immeasurable risk European banks may be hiding)

The process of "forbearance" – where banks do not foreclose on non-performing loans – has been encouraged by new bank capital regulations, such as Basel III, which discourages banks from writing off these loans, according to the Adam Smith Institute.

- By CNBC's Catherine Boyle. Follow her on Twitter: @cboylecnbc.

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