The Martin Currie European Hedge Fund is cutting its net long exposure. Co-managers of the equity long/short fund Michael Browne and Steve Frost have also urged the European Central Bank, ahead of its policy meeting on Thursday, to add liquidity.

The managers note: “We have two worlds in Europe at the moment: the real world and the financial world. The real world is in good shape. Germany’s unemployment level has fallen to the lowest in 18 years, according to government data today, and the country’s economic health is boosting the growth of core European nations such as France and Italy.”

They add: “The problem is that disasters in the financial world can and do spill over in to the real world – Lehman for example. Germany and the ECB should realise as soon as possible that the collapse of peripheral debt is going to cost them dearly and they may be on the way to making a catastrophe out of a crisis (let us not forget, Germany’s insistence at a summit in October for a new mechanism to cover cash-strapped countries helped precipitate the latest episode of the debt debacle).”

“Basically, the Irish situation shows that we have a withdrawal of liquidity from anywhere in Europe that’s not Germany. As usual European authorities are slow to recognise the extent of the problem. The ECB needs to increase liquidity in these markets; otherwise, things will get a lot worse. While we don’t hold out much hope of the ECB doing much at this Thursday’s meeting, we do expect it to do something when it realises this crisis could escalate. Thus, we have reduced our net long position a small amount to give us room to manoeuvre while we wait for European authorities to take action to sort out this mess.”