Published 2023-07-09
Abstract
Using loan-level data covering 1.8 million euro-denominated corporate exposures, we examine how the 2022 shift from negative to positive ECB rates precipitated widespread defaults among zombie firms. Difference-in-differences estimates indicate that zombie borrowers—defined as firms with EBIT < interest expense for three consecutive years—faced a 23 % higher default probability relative to healthy peers after the first 200-basis-point hike. Transmission channels include covenant breaches (59 %), working-capital squeezes (28 %), and fire-sale externalities (13 %). Counterfactual simulations suggest that targeted refinancing operations could have reduced cumulative output loss by €31 bn. The paper warns against uniform rate trajectories when balance-sheet heterogeneity is high.