John Paulson, the hedge fund manager who made a killing by shorting U.S. real estate before the bubble burst a few years ago, says the European Central Bank needs to create a “firewall” to address Europe’s current problems.

“Last week’s statement from European leaders should go a long way toward fiscal consolidation, a necessary step toward the long-term viability of the euro,” Paulson writes for the Financial Times. “But it did not provide the ‘firewall’ to address the short-term liquidity needs that the markets wanted.”

Paulson says a solution similar to the one the U.S. adopted during its financial crisis a couple years ago is needed. “Drawing on our experience restructuring companies along with lessons learned in the US following the bankruptcy of Lehman Brothers, we suggest the ECB consider a sovereign debt guarantee programme as a solution to the European sovereign debt crisis,” he says. “Such a scheme would be similar to the successful Temporary Liquidity Guarantee Program adopted by the US’s Federal Deposit Insurance Corp to stem the financial crisis after the failure of Lehman by enabling financial institutions to refinance their maturing debt and avoid a default.”

Such a program would immediately calm credit markets, Paulson says. “It would be non-inflationary and would allow Italy and Spain (and other countries, if necessary) to refinance their maturing debt at reasonable rates,” he adds. “It would also ease pressure on banks as concerns about their sovereign credit exposure would subside.”