The European Central Bank has warned about creeping "corporate zombification" in euro area companies.
In its latest Financial Stability Review, the ECB warns that unprofitable firms are being supported by various government schemes introduced during the pandemic.
The ECB is concerned this could hamper and delay a post-pandemic recovery.
It said that changes to insolvency schemes should be considered as well as "better infrastructure" for banks to handle bad loans.
The ECB defines zombie firms as companies that fail to turn a profit and are supported by credit. It estimates that smaller firms are 20 times more likely to fall into this category than bigger companies.
The ECB also warned that while insolvencies fell across the euro area to historic lows during the pandemic, thanks to support schemes, considerably higher insolvency rates from here on can not be ruled out.
"As the euro area emerges from the third wave of the pandemic, risks to financial stability remain elevated and have become more unevenly distributed.
"A higher corporate debt burden in countries with larger services sectors could increase pressure on governments and banks in these countries," Luis de Guindos, Vice-President of the ECB said.
