SECRET
6
Any guarantee should be tailored to take account of the following
considerations:
(i) in principle it should be capable of being subsumed into
any new generalised Sterling Agreement (although the
latter would probably not be on a m.f.n. basis);
(ii) it must be capable of implementation under floating.
There was, of course, no trigger rate in the 1968 Bond arrangement
under which issues and redemptions were to be undertaken at the parity
rate at the appropriate times: instead H.M.G.'s liability to pay
compensation was limited by reason of the fact that bond issues were
to be restricted to 50% of Government-owned reserves up to a limit of
£150 mm. Instead of limiting the amount of sterling guaranteed in
that way it would be possible to introduce the equivalent of a trigger
by issuing bonds at, say, 1024 and redeeming them at 100.
any fall in the sterling rate beyond 24% would have to be met by H.M.G.
when repaying the bond with Hong Kong dollars bought in the market,
and since a bond has no apparent advantage over a straight guarantee of
balances, the latter would appear to be preferable particularly since
it would fit in better with any possible future generalised
arrangements.
However,
The following aspects need to be taken into account in a
straightforward guarantee of balances:-
(i) the numeraire;
ii) the trigger;
(iii) balances to be guaranteed;
(iv) the proportion of the eligible sterling holdings to
be guaranteed:
(v) implementation under floating.