Zombie firms
– businesses that survive only through continued financial support despite lacking long-term viability – pose a significant challenge to economic growth worldwide. Research has documented their persistence in various economies (e.g. Albuquerque and Iyer 2023), particularly following financial crises, where banks and governments often sustain struggling firms to avoid mass defaults. However, this support can lead to capital misallocation, reduced productivity, and slower economic recovery. Understanding the dynamics of zombie firms is crucial for developing effective policies to promote sustainable economic growth.
The case of Greece exemplifies how zombie firms, in combination with overdue business loans, propagated allocation inefficiencies and delayed the path of economic recovery. During the sovereign debt crisis decade 2010-2019, Greece saw a sharp rise in zombie firms, accounting for about 20% of businesses, representing 30% of total net fixed capital, and non-performing exposures (NPEs) exceeding 50% of total loans at their peak (Figure 1). In parallel, the investment gap of the Greek economy during 2010-2019, calculated as a deviation of fixed investments’ share of GDP from the EU average, stood annually on average at 7% of GDP (Pissarides et al. 2023). Although the situation has improved in recent years, a notable number of distressed firms continue to drain financial and physical resources, hindering their reallocation to more productive uses.
Addressing this issue is essential for enhancing investment, employment, and productivity in Greece. The share of zombie firms was positively correlated with the business NPE ratio in bank balance sheets over the period 2002-2021. However, the rise in the share of zombie firms preceded the rise in NPE ratio in bank balance sheets, while the decline in the share of zombie firms preceded the decline in the share of NPEs. This suggests that the zombie ratio acts as a leading indicator for the NPE ratio, possibly reflecting partial evidence for loans’ evergreening. Also, it is in line with the observation by Alburquerque and Mao (2023) that weakly capitalised banks have stronger incentives for evergreening, as they have less capacity to absorb losses if a zombie firm defaults. Recently, we have observed a faster decline in the number of zombies relative to that in NPEs, which may be partly due to unresolved nonperforming loans from liquidated firms, which thus are removed from the sample. Moreover, the share of zombie firms is larger than the share of capital concentration in zombie firms up to 2008 and after 2017, implying that the average zombie firm was smaller in size before and after the Greek crisis.
Figure 1 Evolution of estimated share of zombie firms in Greece, share of business NPEs and capital share in zombie firms, 2002-2021
Source: Bank of Greece, ICAP data.prisma, authors' calculations
However, as shown in Figure 2, the significant reduction in NPEs on bank balance sheets does not automatically mean a removal of debt from Greek companies, as the largest part of overdue liabilities by non-financial corporations (NFCs) has been transferred to non-bank credit acquiring companies and is currently managed by ‘servicers’. While the decline in the zombie share in recent years suggests that many unhealthy firms have ceased operations, this does not necessarily imply that their previously employed capital has been reallocated to more productive uses. The unresolved NPEs, as shown in Figure 2, remain a significant barrier. Therefore, it is crucial that these NPEs, which may no longer burden the Greek banking system, are promptly resolved to benefit the overall economy. Addressing these NPEs will not only enhance financial stability but also foster a more efficient allocation of resources, driving sustainable economic growth. This requires removing regulatory barriers in the secondary market of NPEs, combined with simple, effective and transparent institutional frameworks for resolution of overdue private debt liabilities.
Figure 2 Non-performing exposures to NFCs by banks and servicers in Greece, 2015 and 2022
Source: Bank of Greece, ICAP data.prisma, authors' calculations
Figure 3 shows the evolution of the percentage of zombie firms by size class based on turnover. A downward trend in the proportion of zombie firms is evident across all size classes after 2013, with micro businesses featuring the highest zombie rate, 7.8%, compared with 3.0% for each of the other two size classes in 2021. The trend observed in the period 2005-2016, in which the share of zombie firms was higher among large firms than among small and medium-sized firms, is consistent with the findings in the literature (Adalet McGowan et al. 2018, Hallak et al. 2018). In the case of Greece, however, the above relationship is non-monotonic, as it reverses after 2016, while micro firms have the highest share over time.
Figure 3 Share of zombie firms in Greece by turnover size, 2002-2021
Source: ICAP data.prisma, authors' calculations
Figure 4 shows the investment rate and employment growth for all Greek firms in the business economy that are recorded in the ICAP database, as well as for the subsets of non-zombies, zombies, and young firms. It is noteworthy that non-zombie firms perform systematically better than zombie firms over time, while young firms perform significantly better. Also, although the aggregate performance for all firms appears to be close to that of non-zombie firms, which is due to the fact that the share of zombie firms is not particularly high, the question arises as to how the performance of non-zombie firms is affected by the existence of zombie firms.
Figure 4 Investment rate and employment growth in Greece for non-zombie, zombie, and young firms, 2002-2021
Source: ICAP data.prisma, authors' calculations
Empirical insights
Using a panel dataset of Greek firms categorised by size and sector from 2002 to 2021, in a recent paper (Gatopoulos et al. 2025) we show that the Greek economy’s experience further supports broader trends observed in other countries. Notably, we show that:
- Healthy firms outperform zombies in investment, employment, and productivity, while they have to increase productivity to survive in zombie-dense sectors.
- Young and large firms outperform zombies in investment, employment, and productivity, even during economic crises.
- A high concentration of zombie firms negatively affects investment rates in healthy firms, particularly in sectors such as Manufacturing, Energy and Tourism.
- Zombie firms’ concentration limits resource reallocation to more productive uses.
- Sectoral differences matter. Constraints on capital reallocation following the twin deficit crisis have been more binding in tradable sectors like Manufacturing, Trade, and Tourism, hindering the recovery opportunities for healthy firms.
- Estimating the side effects of either through the zombie capital share or the smoother zombie number share offers complementary insights at the sectoral level, while closely related.
Discussion
Countries that face deep and protracted recessions, like Greece, may face unprecedented shares of zombie firms and NPEs, which impede the speed of business restructuring and economic recovery. Greece has made strides in reducing its stock of NPEs and zombie firms since their peak in the 2010s, albeit the process has lasted for over a decade. Besides, the country still faces a significant challenge in ensuring that capital is redirected to productive investments, rather than being trapped in inefficient businesses.
Despite progress recorded since the peak of the crisis, numerous zombie companies and sizable NPEs off-banks remain prevalent in sectors like construction, accommodation, and real estate. Given the strong evidence linking zombie firms to economic allocation inefficiencies, policymakers must take decisive action to expedite their resolution. Such remaining barriers hinder investment, employment, and productivity, affecting both individual firms, specific sectors and the broader economy. Resolving NPEs and reducing zombie firms can free up resources, boost economic growth, and improve the competitiveness of healthy firms. Effective policy measures include accelerating NPE resolution, removing barriers in the secondary market for NPEs, reforming insolvency and corporate restructuring frameworks, enhancing market competition and strengthening institutional and regulatory frameworks. These measures are essential to address remaining challenges and ensure a sustainable growth path, especially for economies that persistently record productivity and investment gaps, such as the Greek economy.
References
Adalet McGowan, M, D Andrews and V Millot (2018), “The walking dead?: Zombie firms and productivity performance in OECD countries”, Economic Policy 33(96): 685-736.
Albuquerque, B, and R Iyer (2023), “The rise of the walking dead: Zombie firms around the world”, VoxEU.org, 28 August.
Albuquerque, B and C Mao (2023), “The zombie lending channel of monetary policy”, VoxEU.org, 6 October.
De Jonghe, O, K Mulier and I Samarin (2024), “Counting the undead: A new metric for identifying zombie firms”, VoxEU.org, 30 October.
Gatopoulos, G, A Louka, K Peppas and N Vettas (2025), “Resolving Bad Loans and Zombie Firms: The Case of Greece”, CEPR Discussion Paper No. 19868.
McGowan, A, D Andrews and V Millot (2018), “The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries”, Economic Policy 33: 685–736.
Pissarides, C, C Meghir, D Vayanos and N Vettas (2023), A Growth Strategy for the Greek Economy, CEPR Press.
