IMMEDIATE
CYPHER/CAT A
GRS 350
FM HONG KONG Ø6042ØZ
SECRET [CULL]
SECRET
TDESKBY 0608ØØZ
TO IMMEDIATE F C O TELNO 728 OF 6TH JULY, 1973.
STERLING GUARANTEE AGREEMENT.
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AS A RESULT OF THE WEAKNESS OF THE U.S. DOLLAR ON THE LOCAL MARKET OVER THE PAST WEEK OR SO, WE HAVE HAD TO LEND SUPPORT FROM TIME TO TIME IN ORDER TO GUARD AGAINST THE POSSIBILITY OF THE RATE FOR THE U.S. DOLLAR FALLING TO THE FLOOR (HK DOLLARS 4.9706) SUDDENLY. PRESENT INDICATIONS ARE THAT WE SHALL HAVE TO START ACTUALLY DEFENDING THE RATE FOR THE HK DOLLARS 5.0000 BARRIER WAS BROKEN YESTERDAY. (AT OPENING TODAY SELLERS WERE OFFERING FAIRLY LARGE QUANTITIES OF U.S. DOLLARS AT HK DOLLARS 4.9975).
2. THIS MEANS THAT THERE IS A VERY REAL POSSIBILITY OF OUR BREACHING OUR M.S.P. OBLIGATION FOR, AT ABOUT THE TIME THE PRESENT PRESSURE BEGAN TO BUILD UP, WE HAD AT LAST UTILISED UP TO NEAR THE LIMIT OF OUR DIVERSIFICATION FACILITY (AND WE WOULD HAVE BEEN OPEN TO JUSTIFIABLE CRITICISM HAD WE NOT MANAGED TO DO THIS).
3.
WE COULD, OF COURSE, PROGRESSIVELY SWITCH PART OF OUR U.S. DOLLAR POSITION INTO STERLING SO AS TO OBSERVE OUR M.S.P. OBLIGATION BUT, IN VIEW OF THE CONTINUING UNCERTAINTY ABOUT THE FUTURE OF THE STERLING GUARANTEE AGREEMENT, WE ARE MOST RELUCTANT TO DO THIS. FURTHERMORE, THERE IS NOW A RESURGENCE OF WORRY ABOUT THE FUTURE OF OUR RESERVES IN BANKING CIRCLES AND, IF UNOFFICIALS WERE TO BECOME AWARE THAT OUR STERLING POSITION HAD INCREASED, WE WOULD BE GREATLY CRITICISED. (FROM TIME TO TIME SMALL AMOUNTS OF STERLING BECOME AVAILABLE ON THE LOCAL MARKET, PARTICULARLY RECENTLY WHEN THE BANK OF CHINA'S OFFTAKE HAS BEEN REDUCED,
AND WE TAKE THESE UP ON OFFER AGAINST HONG KONG DOLLARS: BUT THIS IS A DIFFERENT MATTER TO SWITCHING OUT OF U.S. DOLLARS INTO STERLING),
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/ 4. ACCORDINGLY,