By Brian Blackstone 

ZURICH -- The number of profit-constrained "zombie" firms has risen sharply since the late 1980s, according to research published Sunday by the Bank for International Settlements, a sign of the lingering effects from ultralow interest rates since the financial crisis.

Zombie firms are generally defined as companies that can't service their debt from profits during an extended period. These types of companies, which first gained attention in Japan decades ago and have since gained prevalence in Europe, steer resources away from healthier parts of the economy, weighing on productivity and economic growth.

"The prevalence of zombie firms has ratcheted up since the late 1980s," according to a paper published Sunday by the Switzerland-based BIS, a consortium of central banks, in its quarterly review of financial market developments.

Under a broad definition -- the ratio of earnings before interest and taxes to interest paid is less than one for three-straight years in companies more than 10-years old -- the percentage of zombie companies rose from 2% in the late 1980s to 12% in 2016. The data used by the authors covered 14 developed economies including the U.S., Japan, Germany and France.

And they seem to stay that way for longer. The authors found that whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016. Low interest rates have helped these firms stay afloat by reducing their financial pressure to reduce debt.

"Lower rates boost aggregate demand and raise employment and investment in the short run. But the higher prevalence of zombies they leave behind misallocate resources and weigh on productivity growth," the authors wrote.

"Should this effect be strong enough to reduce growth, it could even depress interest rates further," they wrote.

Meanwhile, turning to broader developments in global financial markets, a top BIS official warned that the global economic recovery faces risks from "overstretched" developed economies and too much debt, increasing the risks of renewed turbulence that central banks may have difficulty addressing.

"With interest rates still unusually low and central banks' balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse," said Claudio Borio, chief economist of the BIS.

The BIS noted the recent divergence between rich countries and developing ones, which was a dominant feature of financial markets. Developed economies, led by the Federal Reserve, have been slowly unwinding the emergency measures undertaken during the financial crisis.

Meanwhile, emerging-market countries such as Turkey have had to raise interest rates or maintain them at high levels despite weak economies, to protect national currencies that were hammered by global trade tensions and the Fed's rate increases. After 16-straight months of inflows into emerging-market investment funds, that pattern was "cut short" in May, the report said.

"Even as [advanced economy] markets were buoyant or stable, sentiment turned sharply against [emerging-market economy] assets," BIS said.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

September 23, 2018 12:14 ET (16:14 GMT)