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.

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