SECRET
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of a straight guarantee of balances in a way which would seem likely
to tie in with any generalised arrangements which may eventually be
offered to Agreement countries.
In brief a guaranteo -
(a) of all Government sterling but only part of the banks'
sterling, the balance of the latter being sold to
Government in exchange for local paper;
(b) to be based on the average rate of snake currencies on
25th September with a 21% trigger and applicable to
100% of eligiblo balances;
(c) conditional on the Hong Kong Government issuing local
paper at a realistic rate of interest not far below the
yield on sterling short-term assets which the Hong Kong
dollar paper would roplace. This is of the essence of
the arrangement to ensure that such a risk-froe asset
would be attractive to the banks and others thus
hopefully resulting in an active secondary market which,
ceteris paribus, should ensure minimum recourse to a lender of last resort (the Accountant General pending
banking reform);
(d) possibly also conditional on the Hong Kong Government
winding up their internal Hong Kong dollar guarantee -
which is too favourable to the banks and might act as a
disincentive to the take-up of local paper and
substituting a new guarantee of bank sterling an
precisely the same terms as those in II.M.G. s possible
Furthermore, the Hong Kong Government
new guarantee.
should be encouraged to offer to pay compensation under
their present guarantee in the form of local paper in