COPENHAGEN • There is no end of theories on all the ways in which 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 more 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 are also often customers of weak banks, which can create a vicious circle of risks to a financial system.
Denmark identified zombies using the definition set by the Organisation for Economic Cooperation and Development: A firm that has been around for at least 10 years and has not generated enough operating profit to cover interest payments for three years in a row.
The central bank's study last month shows there was a brief increase in zombie numbers in Denmark after the global financial crisis, to around 1.9 per cent of all firms in 2011, but the figure has since dropped below 1.5 per cent.
It also shows interest rates paid by zombie companies match those paid by other firms, meaning banks are not cutting zombies any slack.
Not only has Denmark's zombie count fallen while the country has lived with negative rates, but the overall level of such firms is low, even compared with its Nordic neighbours Sweden and Finland.
The Danish central bank points to a number of factors 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.
"The Danish financial system, including banks, does not seem to show forbearance to unprofitable zombie firms in the private non-primary sector," the central bank said.
"This is probably one reason why the prevalence of zombies in Denmark has not increased."