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de-zombification of zombie banks

July 15, 2014

From Reuters column: “Banco Espirito Santo and bail-ins” by James Saft:

The resolution of BES, should it prove necessary, might bring other benefits. Guntram Wolff, a director at European think tank Breugel, argues that it might ultimately lead to ‘de-zombification‘ in Portugal. Zombie banks are those impaired enough that their energies are used in keeping themselves upright rather than in playing their role within the economy.

National authorities, notably Japan in the past, often abet zombie banks as the easier course, but doing so can leave the rest of the economy without the credit it needs to recover.

Given the euro zone’s dependence on bank financing rather than capital markets, this is no small issue. If zombie banks are allowed to fail, ultimately credit flows improve, perhaps both in volume and impact.

Note incidentally, last week in The Desert Sun: “Is U.S. in Danger of Replicating Japan’s Zombie Economy?” by Morris Beschloss.

Saft’s reference to Guntram Wolff was yesterday published in Bruegel: “Three questions on the Banco Espírito Santo case for banking union“:

how much will the BES case affect economic growth of Portugal? Hopes are it will be an instance of de-zombification, which improves growth prospects, but negative market reactions and spreading contagion could undermine growth instead, at least in the short run.

zombie guntham wolff zombie james saft

Wolff’s article hyperlinks the word “de-zombification” to another Bruegel article about “zombie banks” from last month: “The ECB’s bank review: Kill the Zombies and heal the wounded” by Ajai Chopra and Nicolas Véron.

There have been many ZombieLaw posts about “zombie banks” and it is particularly humorous to note that this story is about a bank named ‘Espirito’ (zombie spirits?).

See also ZombieLaw links to more Reuters zombies.

From → economics

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