I often find myself watching business cycles the way someone watches weather — patterns emerge, subtle shifts accumulate, and what once seemed like occasional storms can become a season of turbulence. Lately I’ve been tracking an uncomfortable trend: the persistence of low-productivity firms kept alive by debt rollovers and supportive lending. It's tempting to treat "zombie companies" as a niche corporate governance issue, but the risk in 2026 is that a combination of higher rates, supply-chain reordering, and lower demand could turn many of these firms from slow-burn problems into sources of systemic weakness. In the sections below I’ll define what economists mean by zombies, examine the drivers likely to matter in 2026, explain the channels through which these firms can harm the broader economy, and offer pragmatic guidance — for policymakers, investors, and managers — on how to prepare. This is not investment or legal advice; it's a synthesis designed to help you recognize the risks and consider options.
What Is a "Zombie Company" and Why Should You Care?
The phrase "zombie company" has a specific economic meaning: it refers to firms that are essentially insolvent or unviable in the long run because their operating profits are insufficient to cover interest payments on outstanding debt. In practice, survivors limp along because creditors continue to roll over loans, banks delay recognizing losses, or public support (explicit or implicit) prevents bankruptcy. In my experience analyzing corporate cycles, the important point is not only that these firms exist but that their persistence alters resource allocation across the economy.
Why does that matter? First, zombies depress aggregate productivity. When capital and talent remain tied up in low-return firms, they are not available for more productive investments. That slows growth and reduces the economy's resilience. Second, zombie firms distort competition: incumbents that are effectively subsidized by lenders can undercut healthier rivals, creating a market environment where inefficient firms survive while potentially innovative startups struggle to scale. Third, the banking and financial sectors become more exposed; unresolved nonperforming loans reduce banks' lending capacity and can force riskier behavior as institutions search for yield.
From a measurement standpoint, economists have used several operational definitions. A common approach is to classify firms as zombies if their earnings before interest and taxes (EBIT) are lower than their interest expenses for a sustained period (e.g., three consecutive years), adjusting for firm size and sector conditions. Other definitions incorporate low or negative productivity growth, combined with continued access to credit. Each method has tradeoffs: strict interest-coverage criteria may miss firms with temporarily manageable interest burdens due to very low rates, while broader productivity criteria may classify structurally weak but strategically supported firms as zombies.
It's also important to recognize heterogeneity. Not every low-profit company is a systemic risk. Some industries — typically capital-intensive or cyclical sectors — can show stretched margins without implying long-term insolvency. The real danger arises when a large fraction of firms in tradable sectors, or in systemically important markets, become persistently dependent on external support. At the aggregate level, what turns an individual zombie into a macro problem is scale and connectivity: large numbers of zombies concentrated in particular regions, supply chains, or lender portfolios can amplify shocks.
I should also flag measurement challenges: accounting practices, regulatory forbearance, and one-off gains can obscure true interest coverage. During periods of low rates or when firms receive tax or subsidy support, headline measures can look healthier than the underlying economic reality. As rates normalize, hidden vulnerabilities surface. That's why many analysts emphasize trend-based measures and stress-test scenarios — to see how firms perform under less favorable financing conditions.
In short, zombie firms matter because they change how capital and labor are allocated, weaken competition, and create risk concentrations in the financial system. The remainder of this article looks at why 2026 could be a critical year for such dynamics and what the likely economic channels of harm are.
Why 2026 Could Be Risky: Macro Drivers, Markers, and Timing
Projecting economic risk is always probabilistic rather than deterministic. That said, several converging trends — structural and cyclical — could increase the prevalence and danger of zombie firms in 2026. I’ll walk through the main drivers: interest rate normalization, fiscal and regulatory scarring from previous crises, sector-specific shifts, and global demand rebalancing. Each driver amplifies zombie dynamics in distinct ways.
First, monetary policy normalization matters. After decades of historically low interest rates, central banks moved toward higher rates in many jurisdictions to combat inflation. If rates remain elevated or experience volatility due to policy calibration errors or new inflationary shocks, firms that had depended on cheap refinancing will see interest costs rise and access to credit tighten. For companies with tight margins, even modest rate increases can push interest coverage ratios into negative territory. Banks may tolerate a period of elevated nonperforming loans only for so long; if delinquency rises materially, lending standards tighten further, triggering a negative feedback loop.
Second, fiscal policy and regulatory responses to earlier crises can create "forbearance tails." During shocks like the COVID-19 pandemic, many governments and regulators implemented loan moratoria, subsidy programs, and fiscal transfers that kept otherwise nonviable firms afloat. As emergency programs were wound down, some firms continued only because private creditors did not fully recognize losses or because restructuring was deferred. By 2026, the cumulative effect of such forbearance may be clearer: latent insolvencies that were masked by temporary support could become visible, particularly if economic growth softens or supply-chain disruptions reduce revenues.
Third, structural shifts across sectors increase the risk of firm-level obsolescence. Consider retail, travel, commercial real estate, or fossil-fuel-intensive industries: demand patterns are reshaping, hybrid work arrangements have affected office occupancy rates, and green transition policies are accelerating capital reallocation. In sectors undergoing structural decline, firms that previously survived on low-cost financing are less likely to regain competitiveness, raising the share of firms that are economically "zombie" rather than temporarily distressed.
Fourth, global demand composition and trade reconfiguration play a role. If global growth slows — due to synchronized monetary tightening, commodity shocks, or weaker consumption in major markets — exporters and integrated supply-chain firms can experience demand shortfalls that compound balance-sheet weaknesses. Additionally, re-shoring and strategic decoupling in certain industries create winners and losers: firms not aligned with new supply architectures may face long-term revenue erosion.
Fifth, financial sector health and the distribution of credit matter. Even with higher aggregate credit spreads, zombie dynamics are influenced by lender composition. If nonbank lenders expand and apply different risk appetites, or if small regional banks holding a disproportionate share of local business loans are undercapitalized, distress can become concentrated and harder to resolve. Conversely, large, well-capitalized banking systems with robust resolution frameworks can better manage corporate distress without amplifying system-wide spillovers.
Timing matters because many firms are on annual refinancing cycles. A wave of bond maturities and bank loan renewals concentrated in 2026 could create a refinancing cliff: if enough firms cannot secure affordable funding when their maturities come due, default rates would spike. That is why analysts watch maturity profiles and the calendar of corporate borrowing closely — concentrated maturities combined with tightening markets are a recipe for contagion.
Finally, investor sentiment and valuation dynamics can be destabilizing. If investor risk appetites shift suddenly — for instance, due to geopolitical shocks or macro surprises — credit spreads can widen rapidly, increasing borrowing costs and reducing firms' access to capital markets. This is particularly acute for mid-sized firms that rely on market funding rather than stable bank relationships.
Putting this together, 2026 could be risky because of the confluence of rate normalization, residual forbearance effects, sectoral transitions, concentrated refinancing needs, and potential financial sector vulnerabilities. The magnitude of the risk depends on how these forces interact and on policy responses. The next section explains the channels by which zombie firms can impair the broader economy.
How Zombie Firms Harm the Economy: Channels of Impact and Real-World Consequences
When a significant share of firms becomes dependent on continued access to cheap credit or official forbearance, the damage unfolds through multiple, interacting channels. I’ll break these down into productivity and investment effects, financial stability and banking channel effects, labor market distortions, and competitive and innovation impacts. Understanding these channels clarifies why policymakers and private actors should take early steps to mitigate harm.
1) Productivity and investment crowding. Zombie firms tie up capital (equipment, real estate) and labor in low-return activities. When resources are locked in these firms, fewer productive investments are made elsewhere. Over time, aggregate productivity growth suffers: businesses with higher returns and potential for scaling face financing constraints, while low-productivity incumbents survive. The macro result is lower potential growth and a diminished capacity to respond to future shocks.
2) Bank balance-sheet strain and credit contraction. Banks that carry large portfolios of underperforming loans see their capital ratios erode, which forces them to cut lending to new or higher-risk borrowers. This credit contraction can be procyclical: as lending tightens, healthy firms also find it harder to finance investment, further slowing growth and potentially causing more firms to become insolvent. The interaction between bank health and corporate distress is a key mechanism for systemic amplification.
3) Market concentration and reduced competition. Persistent subsidization of uncompetitive firms reduces churn in markets. That means fewer new entrants and less competitive pressure on incumbents to innovate or improve efficiency. Over time, this can lead to higher prices for consumers, reduced product variety, and lower overall economic dynamism. Competition policy and timely corporate restructuring can mitigate this, but delayed action compounds the problem.
4) Labor market mismatches. Zombie firms often maintain employment levels below optimal productivity, but still above what would be efficient if markets reallocated workers. That leads to skill mismatches: workers remain in declining sectors where wages and training opportunities are limited, while growing sectors may face shortages. Long-term, this can reduce labor force participation and wage growth in high-productivity areas.
5) Fiscal costs and moral hazard. When governments step in with bailouts or extended forbearance, direct fiscal costs can be large. There is also the risk of moral hazard: if firms anticipate public support during downturns, they may take on riskier strategies or delay necessary restructuring, expecting future rescue. Over time, this can weaken governance standards and lead to inefficient allocation of taxpayer funds.
6) Contagion through supply chains. Zombies are not isolated; they can sit at critical nodes in supply chains. Failure of a single mid-sized supplier to modernize or finance essential capex can ripple upstream and downstream — causing production delays, increasing costs for more productive firms, and reducing the competitiveness of entire sectors. Such contagion can be particularly harmful in industries with just-in-time logistics or specialized inputs.
7) Investor confidence and market volatility. As zombie dynamics become visible — rising defaults, corporate restructurings, or higher nonperforming loans — investor sentiment can sour. Credit spreads widen, equity valuations fall, and capital re-pricing can become abrupt. Volatility feeds back into corporate financing conditions, making recovery harder and increasing the chance that temporary distress becomes permanent insolvency for otherwise viable firms.
Real-world examples illustrate these channels. After the global financial crisis, some banks in affected regions kept zombie firms on life support through loan rollovers and regulatory forbearance, which prolonged recovery and delayed necessary reallocation. Similarly, in countries with heavy state ownership or loan-forbearance practices, productivity gaps persisted longer than in economies that allowed faster restructuring. These historical lessons show that delayed resolution often costs more in the long run.
In short, zombies matter not only for the firms themselves but for productivity, financial stability, labor markets, competition, and public finances. The next section discusses policy, corporate, and investor responses that can minimize these harms while acknowledging political and operational constraints.
Policy and Private-Sector Responses: How to Prevent a Broader Zombie Problem in 2026
Addressing zombie dynamics requires a mix of policies and private actions that promote timely recognition of losses, efficient restructuring, and reallocation of resources. There is no single silver bullet. Below I outline practical steps across four actors: policymakers (macroprudential and fiscal), banks and regulators (resolution and provisioning), firms and managers (restructuring and competitiveness), and investors (risk assessment and engagement).
Policymakers: the priority is to balance short-term stability with medium-term reallocation. Emergency forbearance can be justified during acute shocks, but prolonged support risks creating zombies. Policymakers should design clear, time-bound programs with sunset clauses, and pair any support with incentives for restructuring and recapitalization. Strengthening insolvency frameworks — making bankruptcy processes faster, less costly, and more predictable — helps markets reallocate capital efficiently. Macroprudential tools, like countercyclical capital buffers and more forward-looking provisioning standards, can reduce the incentive for banks to roll over weak credits indefinitely.
Banks and regulators: accurate, timely recognition of nonperforming loans is essential. Regulators can encourage stress testing that explicitly incorporates scenarios of elevated interest rates and demand shocks for 2026. Better provisioning and limits on related-party rollovers can reduce moral hazard. When workouts are necessary, supervisors should support transparent restructuring processes that protect depositors while allowing for orderly resolution of insolvent firms. In some jurisdictions, creating dedicated restructuring platforms or "bad banks" to manage legacy troubled assets can speed cleanup while isolating risk.
Firms and managers: corporate leaders must confront underlying competitiveness issues. For marginal firms, the realistic choices are restructuring, strategic repositioning, or orderly exit. Managers should focus on core profitability, rationalize unprofitable product lines, and seek capital structures aligned with long-term volatility. Where possible, equity injections or operational turnarounds should be honest about prospects rather than temporary fixes that postpone the inevitable. Boards have a governance role here: avoiding short-term accounting fixes in favor of sustainable strategies reduces the chance of sliding into "zombie" status.
Investors and creditors: identify exposure to potential zombie risk by analyzing interest coverage, debt maturity profiles, and sectoral headwinds. Active engagement and conditional financing can promote necessary restructuring. For bondholders and banks, designing incentives for timely restructuring — such as conversion clauses or equity-for-debt swaps — can reduce long-term losses compared to delayed enforcement. Diversification and stress testing portfolios against a 2026 refinancing shock are prudent risk-management steps.
Operationally, some tools are especially useful. Early-warning indicators — rising debt-to-EBITDA, falling operating margins, and increasing reliance on short-term debt — should trigger enhanced monitoring. Maturity ladder analysis reveals refinancing cliffs. Scenario modeling (e.g., what happens if rates rise 200 bps or demand falls 10% in key markets) helps prioritize interventions. Public-private coordination platforms can help manage widespread sectoral distress by aligning incentives for bail-ins, targeted support, and labor market adjustments.
Finally, communication matters: clear signals from regulators about the end of temporary support, combined with guidance on restructuring expectations, reduce uncertainty. Uncertainty itself is corrosive — when creditors and borrowers do not know the rules of the game, mutual forbearance can persist and produce systemic harm. Thoughtful, transparent policy design and credible commitment to orderly resolution are therefore central to preventing a broader zombie problem in 2026.
Practical Guidance: What Households, Small Businesses, and Investors Should Watch in 2026
If you're not a policymaker or a bank executive, what should you watch for in 2026? The good news is that there are actionable signals and steps non-experts can use to assess risk exposure and make informed decisions. Below I share concrete indicators and practical tips for households, small business owners, and retail or institutional investors.
For households: pay attention to local labor market signals. If major local employers or sectors report consistent restructuring, or if new business formation falls sharply, that could signal that resources are not being reallocated efficiently. At a personal financial level, maintain emergency savings, reduce unnecessary leverage, and avoid concentrating retirement savings in firms or sectors facing structural decline. Keep an eye on local bank health indicators: if your regional banks are well-capitalized and diversified, community credit availability is more likely to persist through shocks.
For small business owners: assess customer concentration and supply-chain dependencies. A healthy business model in a shaky macro environment is diversified across customers and has manageable debt maturities. If most sales rely on a handful of large buyers, or if key suppliers are in financially strained sectors, consider contingency plans: diversify suppliers, renegotiate payment terms, and build liquidity buffers. When borrowing, align loan tenors with the productive lifespan of financed assets and avoid short-term rollover risk for long-term investments.
For investors: examine interest coverage ratios, debt maturity schedules, and sectoral outlooks when evaluating corporate exposure. A firm with low EBITDA relative to interest expenses and a large proportion of debt maturing in the next 12-24 months is vulnerable to a refinancing shock. Use scenario analysis to estimate losses under higher rates and weaker demand. When investing in banks or financial-sector instruments, review nonperforming loan trends and coverage ratios rather than only headline profitability.
Practical portfolio actions include rebalancing away from over-exposed sectors, increasing cash or high-quality liquid assets as insurance, and favoring issuers with transparent governance and strong liquidity positions. For fixed-income investors, prefer bonds with better structural protections (e.g., strong covenants and shorter maturity ladders) and consider active credit strategies that can engage with management on restructuring when necessary.
Across all groups, maintaining an adaptive mindset is key. Risks in 2026 will be uneven across geographies and sectors; blanket assumptions are dangerous. Regularly review exposures, use clear metrics (interest coverage, debt-to-EBITDA, maturity concentration), and prepare contingency plans. In many cases, early, honest restructuring — even if painful — reduces total economic and social costs compared to prolonged forbearance followed by disorderly failure.
If you follow corporate or financial news, pay attention to aggregate metrics like corporate interest coverage ratios, bank nonperforming loan rates, and the calendar of corporate bond and loan maturities for 2026. These will be early signals of stress.
Below I’ve included a concise checklist you can use:
- Interest Coverage: Is EBIT consistently below interest expense?
- Maturity Concentration: Is there a refinancing cliff in the next 12-24 months?
- Sector Outlook: Is the sector facing structural demand declines?
- Bank Exposure: Do local banks appear to have growing NPL ratios or weak coverage?
- Policy Signals: Are emergency supports winding down or being phased out?
Being prepared doesn’t mean overreacting. It means monitoring the right indicators, diversifying exposures, and advocating for transparent and timely resolution when necessary. In many cases, early action saves resources and reduces long-term pain.
Summary & Next Steps
To recap: a "zombie company" is typically unable to cover interest from operating earnings and survives mainly because of lenders’ tolerance or policy support. The risk of a meaningful increase in the number and impact of zombie firms in 2026 arises from a convergence of higher interest rates, the unwinding of pandemic-era forbearance, structural sectoral shifts, and concentrated refinancing needs. The economic channels through which zombies inflict damage include lower productivity, strained banks and credit contraction, reduced competition, labor market mismatches, and potential fiscal costs.
Mitigating these risks requires a balanced approach. Policymakers should favor time-bound support and stronger insolvency frameworks; regulators and banks should promote timely recognition of losses and efficient restructuring; firms should prioritize realistic strategic adjustments; and investors should monitor interest coverage and maturity profiles closely. For households and small businesses, the practical steps involve building liquidity buffers, diversifying customers and suppliers, and staying attuned to local labor market signals.
If you're concerned about exposure to zombie dynamics in 2026, consider these next steps: run simple stress scenarios on debt maturities and interest coverage; engage with advisors or lenders early if your business faces refinancing risk; and follow macroprudential and regulatory announcements closely — they often signal where support will end and where restructuring may accelerate.
Call to Action
Stay informed and proactive. If you're a business leader, schedule a financing review this quarter to map maturities and contingency plans. If you're an investor, review credit exposures and consider scenario analyses for 2026. For policymakers and practitioners, support reforms that speed restructuring and improve bank resilience.
- International Monetary Fund: https://www.imf.org/
- Organisation for Economic Co-operation and Development: https://www.oecd.org/
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Frequently Asked Questions ❓
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