Longest ever subzero-rate experiment suggests key fear unfounded

Copenhagen

THERE'S no end of theories on all the ways negative interest rates are hurting economies. But in Denmark, where the policy has existed longer than anywhere else, one fear seems to have been put to rest.

The central bank in Copenhagen, which uses negative rates to keep the krone pegged to the euro, says its research shows that the number of so-called zombie firms has fallen amid record monetary stimulus. That goes against the conventional wisdom, which assumes that unnaturally low borrowing costs prop up companies that would collapse in normal times.

"The risk of remaining a zombie has not increased in the low interest rate environment of the post-crisis period," according to the Danish central bank, which first cut its main rate below zero in mid-2012. "This indicates that lower interest rates and cheaper financing have not resulted in a higher prevalence of zombies."

Zombies can be a drain on an economy, sucking up labour and capital that could be better used elsewhere. They're also often customers of weak banks, which can create a vicious cycle of risks to a financial system.

Denmark identified zombies using the definition set by the Organisation for Economic Co-operation and Development: a firm that's been around at least 10 years and hasn't generated enough operating profit to cover interest payments for three years in a row.

The central bank's December study shows:

The Danish central bank points to a number of factors that it says are more important than low interest rates. These include well functioning insolvency laws and a robust framework to protect workers facing unemployment. The observations are consistent with findings made by the European Central Bank. BLOOMBERG