"ZOMBIE" is such a lekker word — conjuring up, as it does, images of the living dead and witchcraft and suspended animation. Apparently the word originated in Haiti, but I don’t buy that — it must have come from Africa. Somewhere around here, perhaps?
The word has found its way into the financial industry (see The rise of the zombie, Financial Times, January 9 2013) where it is used to describe "ailing businesses propped up by bank loans", particularly in Europe.
Loose monetary policy now seems to be universally adopted as the cure of all economic ills. I have never believed it can save the world; rather, it will perpetuate weakness. It flies directly in the face of the principle of survival of the fittest. Keeping terminally ill patients on life-support systems may have short-term virtues but it certainly doesn’t create new life.
There is no such thing as zero-cost capital. Surely we all know that? Zero-cost capital sterilises real capital. If there is an abundance of forgiving, no-consequence government support for banks to support companies that have no independent survival prospects — let alone a sustainable growth plan — then real capital will not be deployed into growth.
It’s not so bad in South Africa, but in parts of Europe everyone is in over their heads. They’re all huddled together waiting for something they don’t yet know about to swoop in and save them from their circle of impotence. Banks can’t call in their loans because that would precipitate significant write-downs, which would shift the burden back onto central banks, which would require more monetary easing, which … Yawn. You’ve all seen the movie.
How did this all happen?
Banks continued to lend money to businesses and people despite the obvious declines in the real economy almost worldwide. Expenses have a nasty habit of growing all by themselves, effortlessly, with scant regard for what’s happening further up in the income statement.
If the real economy doesn’t generate sufficient cash to cover those expenses, then companies have to borrow to make ends meet. It is really that simple, and cash really is king.
The amount that businesses or individuals can borrow is obviously limited to their ability to service the interest and repay the capital. In established businesses with strong market shares, there is a much higher tolerance for temporary funding gaps.
The rescue comes when the cycle changes, as it inevitably does, and the reserves can bide you over until then. The truth is that most companies cannot survive even a three-month downturn (never mind years of recession) without cash support.
The first move is to delay the problem: lengthen the term of the loan or reduce the monthly repayment instalment. At the limit the company is servicing interest only. As that gets tougher and tougher across the economy, the government comes to the rescue by dropping interest rates. When rates finally get to zero, there is nowhere to hide.
In the final result, when a company’s full operating earnings are being used to pay interest and your entire take-home pay is needed to service your bond, then the economy comes to a standstill. It has to; nothing is being created.
Well-intended soft monetary policy, sustained in the face of no measurable turnaround in the economy, has some really serious unintended consequences:
• Unpopular (but necessary) expenditure on repairs and maintenance is deferred, creating a backlog that can cause failure (travelled on a train lately?).
• Nothing is left to be spent on growth, new ideas or even market-share retention — advertising and other "luxuries" are cut back.
• No new risks are taken and no start-ups funded — equity risk capital retreats as the owners of the debt take out all of the returns.
• Hard decisions aren’t precipitated — nothing is terminated, not even the terminally ill.
And so we all stand still, waiting in vain for some exogenous variable to rescue us — the exchange rate, tariffs on imports or the demise of the competition ... whatever.
What has to happen? Well, some businesses have to fail (even banks) to clear out the cupboard, let in some fresh air and breathe life into the strong. It isn’t much fun but it is always worth it. It’s like breaking up with the partner whom you know is wrong for you — the hardest part is the rehearsal, then the speech, but you start feeling good about 30 seconds after it’s done.
What can you do in your business? Over the holidays we all thought about things we wished would change or go away completely. Most often we know what is right; it’s just too hard to actually do it. But the January window is here. It is the season for such things.
Check whether your hunch is right by examining some of the hard facts. Then, if objectivity confirms subjectivity, do it. Close that division that’s never going to make it and take the loss — chip out backwards from the rough and get back onto the fairway.
It is time to move away from incremental survival to fundamental change. This requires clarity of purpose and bold decisions.
If we don’t, we could stand still for years, even decades, in a state of suspended animation, like zombies — ask Japan.
And zombies can’t dance.