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The Real Effects of Zombie Lending in Europe

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  • Belinda Tracey

Abstract

‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

Suggested Citation

  • Belinda Tracey, 2025. "The Real Effects of Zombie Lending in Europe," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 87(1), pages 122-154, February.
    • Handle: RePEc:bla:obuest:v:87:y:2025:i:1:p:122-154
    DOI: 10.1111/obes.12636
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    Cited by:

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      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2021. "Evergreening," Working Papers 2021-012, Federal Reserve Bank of St. Louis, revised Aug 2023.
      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2022. "Evergreening," Working Paper Series 2022-14, Federal Reserve Bank of San Francisco.
    2. Hartwig, Benny & Lieberknecht, Philipp, 2020. "Monetary policy, firm exit and productivity," Discussion Papers 61/2020, Deutsche Bundesbank.
    3. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2025. "Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(4), pages 2197-2227.
    4. Kaehny, Maximilian & Herweg, Fabian, 2022. "Do Zombies Rise When Interest Rates Fall? A Relationship-Banking Model," VfS Annual Conference 2022 (Basel): Big Data in Economics 264126, Verein für Socialpolitik / German Economic Association.
    5. Cheung, Jeff Kin Wai & Imai, Masami, 2024. "Zombie lending, labor hoarding, and local industry growth," Japan and the World Economy, Elsevier, vol. 71(C).
    6. Choudhary, M. Ali & Jain, Anil K., 2021. "Corporate stress and bank nonperforming loans: Evidence from Pakistan," Journal of Banking & Finance, Elsevier, vol. 133(C).
    7. Alejandro Van der Ghote & Luc Laeven & Victoria Vanasco & Alberto Martin & Vladimir Asriyan, 2021. "Falling Interest Rates and Credit Misallocation: Lessons from General Equilibrium," Working Papers 1268, Barcelona School of Economics.
    8. Luc Laeven & Glenn Schepens & Isabel Schnabel, 2020. "Zombification in Europe in times of pandemic," ECONtribute Policy Brief Series 011, University of Bonn and University of Cologne, Germany.
    9. Kotone Yamada & Yukio Minoura & Jouchi Nakajima & Tomoyuki Yagi, 2023. "Corporate Finance Facility and Resource Allocation: Research Trends and Developments during the Spread of COVID-19," Bank of Japan Working Paper Series 23-E-1, Bank of Japan.
    10. Fabian Herweg & Maximilian Kähny, 2022. "Do Zombies Rise when Interest Rates Fall? A Relationship Banking Model," CESifo Working Paper Series 9628, CESifo.

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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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