El Zombi is Spanish for Zombie.
The term Zombie is used to describe an economy in which failing companies continue to operate with government support. The term traces to Edward Kane's (Kane, Edward J. (1989). The S&L Insurance Mess: How Did It Happen? ) explanation of the situation of insolvent savings and loan associations in the 1980s. But it is most commonly used to describe Japan in the early 1990s. After Japan’s real estate bubble burst at the end of the 1980s, there was a conspiracy aimed at keeping its banks which were bust lending to real estate and other affected companies which were also bust. This simply offended the good rule about not sending good money after bad. It was a mis-allocation of capital resources, and a society which allows widespread mis-allocation of its capital is doomed. In Japan, it postponed the necessary market cycle of creative destruction in which failed enterprises close down and new capital is allocated to viable operators who can make a positive return on it. It was a major contributory factor to Japan’s “Lost Decade” without any economic growth. Think about it this way: would your wealth grow if you kept pumping money into a loss-making investment?
Why do I mention this? Because according to this report by R.R. de Acuna & Asociados, a property consulting firm, almost half of Spain’s 67,000 property developers are insolvent but not bankrupt after getting additional financing from banks. We are seeing Japan Mk 2 played out in Spain. The bailout of the Spanish banks and no doubt in due course of Spain itself will be for the unstated purpose of funding these Zombies with the inevitable, dire consequences.
The headlines at the weekend about Spain were the outcome of the latest stress test which apparently shows that the Spanish banks need an additional €60 billion of additional capital. The credibility of stress tests for Eurozone banks have long since been stretched beyond breaking point, but in any event, you have to question the sense in re-capitalising Zombie banks.