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Mr. Christofas
Annex attached
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I should be grateful if you would look at the letter from ECGD at (125) about their requirements for covering a loan of £12 million approximately to finance the Hong Kong Tunnel project (in which the Hong Kong Government has agreed to take up a 25% equity interest).
2. In this connection you should read Lord Shepherd's letter at (124) and my minute at (123) which summarises the history of ECGD's requirements in the matter of cover for this loan. From this history and the terms of Mr. Cotterill's letter at (125) it appears fairly certain that ECGD are still concerned about the political risk.
3. In (125) ECGD are once again seeking to cover themselves by a lien on "Hong Kong assets" in the event of our enforced withdrawal from the Colony. It is suggested (the suggestion is attributed to Colonel Clague of Hong Kong) that "it should be possible for the Department to so arrange it that in the event of the envisaged circumstances coming about ECGD would have an unsubordinated right to access to these assets". We have been asked for "the precise legal position in respect of access to these assets" and whether "it might be possible to set up a claim" on them in the circumstances envisaged.
4.
In putting forward this proposal what is ECGD looking for? Presumably some form of undertaking from the Department which would be responsible for administering residual Hong Kong assets (C.O. or Treasury?) that E.C.G.D's. claim will be given first cut. As I see it, this is not an alternative proposition to the joint guarantee (which has been the stumbling block since negotiations reopened this year), but an attempt to stiffen ECGD's requirements on the lines they followed during the troubles last year when they asked for a Hong Kong Government guarantee of the entire loan and the earmarking of official assets in London to this end. ECGD are aware that we supported the Hong Kong Government in rejecting (for political reasons) the latter condition and they now know that there is no prospect in any case of the Hong Kong Government agreeing to give a 100% guarantee.
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5. Such an assurance would have to be kept a close secret even so, the Hong Kong Government might object to our giving it since they might well regard their public service as having a first claim on Government assets. But these considerations apart, is it possible or necessary for a department of H.M.G. to give an assurance on the lines sought? In my view and for the reasons set out in the draft below, I think not.
6. In discussion with Lord Shepherd and Sir Arthur Galsworthy, it was considered that this conclusion was a valid one and that our view should be put to Lord Brown quickly so that he is not deflected from giving further consideration to the basic question of the joint guarantee. For the sake of speed, therefore, I have had to make certain broad assumptions about the legal position namely that :-
/ (a)