Paulson & Co., the $23 billion hedge fund run by John Paulson, said Greece may default by the end of March, triggering the breakup of the euro.
Greece needs as much as 90 billion euros ($117 billion) to meet funding requirements under the anticipated agreement on private sector involvement, the recapitalization of the banks and other funding needs, Paulson estimated in a year-end letter sent to clients this month, a copy of which was obtained by Bloomberg News.
“We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline,” the hedge fund said. The euro is “structurally flawed and will likely eventually unravel,” it said.
Two years after pledging to pull Greece back from the brink, European leaders are torn between pouring more aid into the country or risking an unprecedented national bankruptcy that might force the country out of the euro and prompt renewed market tumult.
Paulson, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, endured his worst year on record in 2011 after his wagers on a U.S. economic recovery went awry. He sold his entire stakes in Citigroup Inc. and Bank of America Corp. last quarter before the shares rallied this year.
“Bank of America has been the biggest disappointment in our banking portfolio,” Paulson said.
The holdings, which he began aggressively building in 2009, were among his largest last year
“While we have seen a reasonable recovery in the U.S. with leading indicators in early 2012 trending positive and equity valuations well below historical norms, the European sovereign debt crisis remains the overriding risk in the markets,” the hedge fund said.
Paulson said it cut its so-called net exposure in its Advantage funds, among the firm’s largest, to 32 percent as of Jan. 31 from 82 percent at the start of last year.
The hedge fund said it reduced the exposure because “we believe such a default could lead to a European banking crisis on par or worse than the world suffered in 2008 when Lehman Brothers failed.”
Armel Leslie, a spokesman for New York-based Paulson, declined to comment on the letter.
The hedge fund reiterated its view that government spending around the world will fan inflation, supporting demand for gold and that now is the time to invest in the metal.
“By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold,” the hedge fund said.