IMF: eurozone in critical danger, ECB should launch QE The bank could try quantitative easing (QE) with "sizable" sovereign bond purchases, possibly preannounced over a given period of time, the IMF said. "Buying a representative portfolio of long-term government bonds - for example, defined equitably across the euro area by GDP weights - would also provide a measure of added stability to stressed sovereign markets," the IMF said. "However, QE would likely also contribute to lower yields in already 'low yield' countries, including Germany," it said. The ECB could also embark on further sovereign bond purchases of countries that are under market stress - its Securities Market Programme (SMP). A well-communicated re-activation of SMP purchases would likely carry strong signalling effects which might mitigate the need for very large purchases. The benefits from lower yields would also ease collateral constraints on official and interbank lending facilities," the IMF said. Another way to ease market tensions was to launch another Long-Term Refinancing Operation (LTRO) - cheap, long-term lending by the ECB to banks that ensures they remain liquid despite the frozen interbank lending market. "This could encompass additional multi-year LTRO facilities, coupled with adjusted collateral requirements, if needed - including a broadened collateral base and/or a lowering of haircuts - to address localised shortages," the report said. The associated credit risk to the ECB would be manageable in view of its strong balance sheet and high levels of capital provisioning. Nevertheless, one of the disadvantages of the LTRO facility is that it tends to strengthen sovereign-bank links. A priority for the eurozone was to create a banking union, which would entail a common eurozone bank supervisor, as well as a common deposit guarantee scheme and bank resolution fund. Eurozone leaders agreed the ECB would play the role of the supervisor, but the IMF suggested the bank should also play a role in the bank deposit guarantee scheme, which, while financed from a levy on banks, should have access to an ECB credit line. Meanwhile, Moody's has warned that European companies that have held up well against the eurozone debt crisis are now increasingly exposed and their credit ratings could be cut in coming months. "The credit quality of non-financial companies has been relatively resilient so far during the sovereign financial crisis in Europe but the risk of credit deterioration is now increasing," it said in a report. Moody's said the industrial sectors most vulnerable to the crisis included building materials, auto manufacturing, auto parts, paper and forest, shipping and steel production. "Revenues and cash flow are declining severely for some companies in markets with falling domestic demand, such as Greece and Portugal and more recently Spain, with increasing risks for Italy," Moody's said. It warned that if the situation worsened, it would expect the ratings of most investment-grade companies in the EU peripheral states to decline, with some moving into speculative grade.