By November 2020, the Bank of England was reviewing moving to negative rates. Will it do it? Effective interest rates on new deposits and loans for non-financial companies are already below 2%. Before the financial crisis of 2007-08 that number was more than 7%, so companies that have refinanced over the past few months via government-guaranteed schemes should be more resilient than they were after the last crisis.

Banks hate the idea of a negative Bank rate. Just as importantly, there may be challenges in ensuring that businesses and consumers would benefit from it. The closer Bank rate gets to zero, the harder it is for banks to pass through interest rate cuts. That is why the Bank of England ran the original term-funding scheme from 2016 to 2018, which let lenders borrow from it at close to Bank rate. The Bank of England is considering negative rates, even though it would discomfort banks, because the economy is reeling from the blows of three lockdowns and needs support.

Silvana Tenreyro, an external member of the Monetary Policy Committee, gave a speech on negative interest rates on 11 January this year. She pointed out that negative rates had worked well, and even very well, in other countries in boosting monetary policy transmission. She also said that there was “no clear evidence” that negative Bank rates had cut overall bank profits. If nothing else, there have been effective negative rates in the past and some studies found that banks did better because the economy was boosted. But she added that the current structure of the UK banking system, which relies heavily on deposit funding, might mean a less positive outcome here.

Her overall assessment was that “negative interest rates should, with high likelihood, boost UK growth and inflation”. Andrew Bailey has said that the Bank of England will do whatever is necessary to meet its remit, but he has also said that “there are a lot of issues” with negative rates, which might lower lending to companies. The next announcement from the Monetary Policy Committee on interest rates is due on 4 February.

Can companies quickly climb back out of the Covid trough – fast enough to prevent scarring to the economy – and can they then boost productivity? Cheap credit should put companies in a good position to invest, but many are struggling to survive. The Financial Conduct Authority announced in January 2020, for example, that around 4,000 financial firms were at heightened risk of failing – thanks to liquidity problems caused by the first wave of the pandemic. And small financial services firms are far from being the only ones in trouble. Non-food retail, hospitality and travel, for example, are all in difficulties – as are, by extension, the real estate companies that provide their premises.

Worldwide, the leverage loan market totals more than $2.2tn, according to the Bank of England. Some of that debt is securitised as collateralised loan obligations (CLOs). These raise spectres of the global financial crisis, when investors took huge losses on securitisations that contained dubious assets.

The Bank of England said in 2019 that UK banks had limited exposure to CLOs. But it also added: CLOs are complex products. It’s uncertain how resilient they will be to an economic stress, which could lead to unexpected losses for investors. So far in the pandemic – even though 2020 was an extraordinary year for CLOs, according to S&P – they have held up relatively well.

What about investment-grade corporate debt? Just as the hunt for yield has fired up the leveraged loan market, so it has made investment-grade bonds very attractive to investors. The riskiest investment-grade US corporate bonds, those rated BBB, had an effective yield of just over 2% in January 2020, according to the St Louis Fed.

The enthusiasm for corporate bonds is partly because the Federal Reserve boosted its quantitative easing, which reduced the amount of ‘safe’ bonds in the market. That enabled blue-chip US companies to go on a cheap borrowing spree. Even Google, which has a fat cash cushion, issued bonds. When it raised $10bn in August 2020, the interest rate on a five-year tranche was 0.45%, reported to be the lowest-ever coupon seen on a corporate bond with that maturity.

Google is unusual because it largely floats above the economic mayhem, but many other companies also raised money at very affordable rates. The Bank of America expects new issuance of investment-grade bonds in the US to be down by 76% this year.

It may be, though, that governments and regulators will not let this crisis go to waste and decide to experiment with radical policies that strongly encourage companies to tackle some of the tough challenges ahead. Government debt has to be paid for at some point – by tomorrow’s taxpayers, as Ben Broadbent, deputy governor for monetary policy at the Bank of England, points out.

The other articles in this section cover different aspects of how debt is affecting the economy and what might come next.