Raghuram Rajan speaks out on zombie companies, a simmering real estate time bomb & more

May 6, 2023

By: Rounak Jain

Credit: BCCL

The lack of a backbone

“The real problem is no authority now has the backbone, or the risk tolerance to see what happens if they let entities fail,” he said, referring to the banking sector crisis in the US and Europe. He added that authorities are unwilling to precipitate yet another Lehman-like moment.

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The old banking system is dead

Rajan also underlined that the old banking system – of earning higher rates on investments and offering substantially lower rates to customers – is dead, as depositors are now smarter and investing directly in treasury bills and money market funds to earn higher interest.

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‘Riskless capitalism’

“I think we have certainly gotten into the zone of riskless capitalism,” he said, referring to the asset-liability mismatch that brought down Silicon Valley Bank.

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‘IMF has a lot of fish to fry’

On being asked why the International Monetary Fund has not pointed out the issue with the US Fed’s implicit guarantee of all deposits without any limits, Rajan said “IMF has a lot of fish to fry”, referring to regions like Africa, Pakistan, Sri Lanka which are deep in debt.

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‘World is getting more volatile’

“We don't seem to recognize that the world is getting more volatile, and climate change is going to just increase that,” he said, talking about countries which got debt relief during the early 2000s and are once again undergoing debt distress.

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‘Zombie companies’ have been supported during 2 years of Covid

Talking about the perils of quantitative easing during the two years of Covid, Rajan said, “Zombie companies have been supported during this process”.

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‘Potential losses waiting to happen’

As a consequence of unchecked easing and subsequently, bankruptcies falling ‘tremendously’, Rajan said there are “potential losses that are waiting to happen” in industrial and emerging markets.

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Commercial real estate in the US is a time bomb

Rajan also spoke about the real estate issues plaguing the US, agreeing that it is a “big simmering time bomb” as companies realign their office spaces to adjust to the fact that ‘work from home’ is here to stay.

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‘Old style offices are going to be a problematic asset’

Overall, Rajan said he believes that there will be a lower demand for office spaces going forward, adding that “old-style offices are going to be a problematic asset”.

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​Largest bank failures in the history of the US