El Zombi

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.

Comments

[prohyp]

Is there anything the Euro Elite will not do as they continue supporting the rot and corruption that keeps the edifice of the EU from toppling over?

[ChrisR]

Terry,

Thanks for this observation

So why does this happen that banks continue to lend to insolvent property development companies? Is it because otherwise their assets would suffer and they themselves would become insolvent (Or more visibly insolvent)? Wouldn't the banks go bust eventually? In which case they are doing this to self preserve. How would you stop the banks mis-allocating capital in this way to self -preserve?

Thanks for your thoughts in advance

[MickC]

Regrettably the entire planet seems to have turned Japanese...

The banks should not have been "rescued", the depositors should.

[Webwrights.wordpress.com]

It's far worse than that, though. Japan has just completed a *second* Lost Decade. The Nikkei 225 peaked at a whisker under 39,000 in 1989. The domestic property market tanked in 1991. The index is now ~9,000, having struggled to break 20,000 only once in the intervening 20 years.

At least the worst of the Spanish problems are largely containable within the state-owned sector. The recent bank stress test results show that 46% of the €60bn requirement is at Bankia_BFA alone, and 86% is at the 4 nationalised entities. Most of the commercial banks are (more or less) healthy. The Oliver Wyman analysis of the stress test is interesting.

[Nick11766]

Paper Money, yet another violation of our rights. The gov’t constantly violates our rights.
They violate the 1st Amendment by caging protesters and banning books like “America Deceived II”.
They violate the 4th and 5th Amendment by allowing TSA to grope you.
They violate the entire Constitution by starting undeclared wars.
Impeach Obama, support Ron Paul.
Last link of “America Deceived II” before it is completely banned:
http://www.amazon.com/America-Deceived-II-Possession-interrogation/dp/1450257437

[Terry Smith]

Prohyp: No, there isn’t anything the Euro “Elite” (I prefer Cabal as Elite suggests some sort of higher quality) will stop at.

[Terry Smith]

Nick11766: I have ordered a copy immediately and will be posting on US politics and the media later this week.

[Terry Smith]

Webwright.wordpress.com: I agree - I used the term “Lost Decade” because it is widely accepted but we are now past two decades in Japan.

[Terry Smith]

ChrisR: Your guess is correct that banks lend to property bust property developers so that at least some people won’t realise that the banks themselves are bust. Yes, the banks will go bust eventually, but they hope to do this over time and that if they reveal the scale of their insolvency slowly and in stages they will be able to raise more capital and/or obtain government funding to keep them trading. How would I stop banks doing this? By taking a leaf out of Iceland’s book and letting the bust banks fail. But the problem goes one stage further: the only people who can take that decision are the governments and most of them are trying to pretend they are solvent too and so they are part of the charade.

[ChrisR]

Terry,

Thanks for the response. Isn't there a problem that governments cant force a bank into bankruptcy. They can do nothing (potentially letting it go bankrupt), but the bank will just continue to bumble along pretending its solvent by continuing to lend money to the insolvent property developers.

Don't governments need a way of triggering an insolvent bank to go bankrupt? In this case would depositors be protected?

Thanks