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NewsOctober 18, 2016

FRANKFURT, Germany -- The walking dead are gnawing at Europe's weak economy -- zombie banks and zombie companies. Almost a decade after the financial crisis that ravaged the global economy, analysts and top officials are warning too many banks in Europe are struggling financially, keeping them from lending to companies and fostering growth...

By DAVID McHUGH ~ Associated Press
The headquarters of Deutsche Bank is photographed in Frankfurt, Germany.
The headquarters of Deutsche Bank is photographed in Frankfurt, Germany.Michael Probst ~ Associated Press

FRANKFURT, Germany -- The walking dead are gnawing at Europe's weak economy -- zombie banks and zombie companies.

Almost a decade after the financial crisis that ravaged the global economy, analysts and top officials are warning too many banks in Europe are struggling financially, keeping them from lending to companies and fostering growth.

Calls to fix the problem have come from the International Monetary Fund, U.S. Treasury Secretary Jacob Lew, and European Central Bank chief Mario Draghi. They say something has to be done if Europe's economy is to gain traction and bring down unemployment.

Soured loans are one of the biggest problems, especially in Italy.

They create a vicious cycle: the slow economy means businesses can't repay their loans.

That leaves banks short of cash to finance new business ventures, which holds back the economy even more.

Getting rid of the bad loans is a struggle. Italy's Monte dei Paschi is trying to offload 27.7 billion euros ($31 billion) in such loans to investors who would buy them at a deep discount.

The bank has to get rid of those problem assets before it credibly can ask investors for more money -- up to 5 billion euros through a share offering.

In Italy, one reason clearing bad loans can be difficult is the courts are clogged, meaning it can take years to pursue the debtors and recover money. That makes the assets worth even less, and the lower the price, the bigger the financial hole the bank has to fill.

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Banks under financial pressure, meanwhile, tend to prop up "zombie" companies by extending loans rather than pressing for repayment.

A group of economists has found banks under stress tend to maintain credit to companies they have a relationship with, even if those companies are struggling. Yanking credit to such companies would mean recognizing the bank's own losses on the loans.

That leaves the bank and companies as walking dead, technically still in business but unable to grow and gobbling up credit that could go to stronger companies.

"Creditworthy firms in industries with a prevalence of zombie firms suffered significantly from credit misallocation, which slowed down the economic recovery," wrote the four economists: Viral Acharya at New York University's Stern School of Business, Tim Eisert from Erasmus University Rotterdam, Christian Eufinger at IESE Business School in Barcelona and Christian Hirsch at the Goethe University in Frankfurt.

The economy of the 19 eurozone countries grew by a quarterly rate of 0.3 percent in April-to-June. That's not enough to bring down the 10.1 percent unemployment rate quickly enough.

Weak share prices for banks have compounded the problems, as they make it harder for banks to raise money from investors.

The STOXX Europe 600 Banks index is off 21.9 percent this year, compared with a milder 7 percent drop for the broader STOXX Europe 600.

Deutsche Bank is off 52 percent for the year to date; Monte dei Paschi is off 86 percent and Switzerland's Credit Suisse 37 percent.

Deutsche Bank's shares plunged after it was reportedly faced a fine of up to $14 billion related to dealings in bonds backed by shaky mortgages before the financial crisis.

All of this would be less of a problem if banks made enough money to build new capital reserves. But earnings have been sagging, too.

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