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'Zombie' firms have benefitted from low interest rates, government loan schemes, moratoria and accommodative credit conditions measures introduced in response to the Covid-19 crisis, a paper published by the European Central Bank Tuesday argues, but only to a "modest" degree. However, the same companies could also face tighter eligibility criteria for future support, alongside greater recognition of credit risk in debt and loan pricing the paper argues, meaning such gains are likely temporary.
The continued market presence of firms considered unviable even before the pandemic's outbreak has helped support aggregate demand, the authors of the study presented as part of the ECB's Financial Stability Review concede, but it may also lead to inefficient capital allocation, and pose medium-term risks to the financial system if risks are not properly priced.