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Zombie Companies Face Collapse as Interest Rates Rise

  //stocks-investing.news-articles.net/content/202 .. panies-face-collapse-as-interest-rates-rise.html
  Published in Stocks and Investing on Tuesday, January 27th 2026 at 13:14 GMT by The Financial Times
      Locales: UNITED STATES, UNITED KINGDOM, IRELAND, CHINA, INDIA

The 'Zombie' Factor: Companies Walking a Tightrope

The term "zombie" in this context refers to companies - and even some countries - that are functionally insolvent. They are kept afloat only by the constant need to refinance their debt, effectively kicking the can down the road. These entities typically operate with minimal profit margins, crippling levels of debt, and a complete reliance on cheap financing to avoid immediate collapse. The recent rise in interest rates, driven by efforts to combat inflation and stabilize currencies, is squeezing these "zombies" relentlessly.

Charlene Chu, senior portfolio manager at Federated Hermes, aptly describes the situation: "We're seeing a really worrying trend of companies and countries that should never have borrowed money in the first place now finding themselves in a very difficult situation."

Emerging Markets in the Crosshairs

The vulnerability is particularly acute in emerging markets. Many of these nations took advantage of the period of easy money to borrow in US dollars, a seemingly advantageous strategy at the time. However, this strategy has left them acutely exposed to the dual impact of rising US interest rates and a strengthening dollar. Servicing dollar-denominated debt becomes significantly more burdensome when the dollar appreciates and borrowing costs increase. The IMF has explicitly cautioned about an impending wave of debt distress, with potential ramifications for the stability of the global financial system.

Takahide Hashimoto, senior economist at State Street, succinctly stated, "The chickens are coming home to roost," summarizing the uncomfortable reality facing many emerging economies.

The Risk of Contagion: A Domino Effect

Beyond the immediate impact on individual companies and countries, the risk of contagion is a significant concern. A default by one entity can trigger a chain reaction, impacting other borrowers and potentially destabilizing the entire financial system. This is especially true if banks have significant exposure to the defaulting entities. The interconnected nature of global finance means that a localized crisis can rapidly escalate into a broader systemic issue.

Investor Response & Future Outlook

The growing apprehension is reflected in the behavior of some investors. Many are actively reducing their exposure to emerging markets, shifting their focus towards companies exhibiting stronger balance sheets and sustainable business models - a flight to safety, if you will. This shift in investment strategy underscores the seriousness with which the potential debt crisis is being viewed.

While the situation is precarious, proactive measures are being explored. International institutions are analyzing vulnerabilities and exploring potential restructuring options. However, as the IMF has repeatedly warned, the global economy appears ill-prepared for a large-scale debt crisis. The next few years are likely to be characterized by volatility and uncertainty, demanding vigilance and adaptability from policymakers, investors, and businesses alike. The long period of cheap money is over, and the consequences are now beginning to be felt.