Resolving Zombie Firms Following a Debt Crisis: The Case of Greece

ABSTRACT During Greece's debt crisis, zombie firms and non‐performing loans reached 20% and 50%. Drawing on a 2002–2021 panel, we show zombies suppress investment, employment and productivity, with heterogeneous impact across sectors and firm characteristics. Higher zombie density hinders investment among healthy firms, particularly smaller ones. Effects on productivity are mixed: negative and more pronounced for larger firms, while healthy firms need to increase productivity to survive in high‐concentration sectors. Following a twin deficit crisis, capital reallocation frictions weigh more on tradable sectors, constraining healthy firms' recovery. Tackling zombies is a key policy priority to improve resource allocation.