SECRET
7
Mr Mitchell said that as this was a confidential meeting he could give the Governor and Financial Secretary some of the background. There was uncertainty in the international monetary situation and at home uncertainty about the prospects for Stage II of the Prices and Incomes Policy, as well as worries over the balance of payments. The Sterling Agreements were relevant in this context but it was not clear what action should be taken in regard to the agreements;
we were living in a rather different world since the US action in August 1971 and the UK floating of the pound in June 1972. He could tell the Governor that as yet no decisions had been taken on the content of the Chancellor's second message. These decisions would have to be taken by the Chancellor and the Prime Minister. However, he could reassure the Governor that the Chancellor's message was expected to go out in the second week of September.
Mr Haddon-Cave said that even so, the Chancellor's message was unlikely to be unsatisfactory. Any new agreement which did not allow for a significant reduction in Hong Kong's minimum sterling proportion (m.s.p.) would be unacceptable. He asked whether Hong Kong would have complete freedom to reject HMG's proposals if they were unacceptable. In any event, negotiations on terms were unlikely to be completed before September 24th. He foresaw considerable pressure on the rate after this date. There was nothing that the Hong Kong Government could do to stop the banks selling forward. Mr Mitchell raised the point that the Hong Kong Government had threatened in one of their telegrams to advise the banks to sell forward. Mr Haddon-Cave said that this must have been a drafting error, but added that the Hong Kong Government's primary obligation was to Hong Kong's own financial stability. If the banks asked for advice it would be difficult for the Hong Kong Government to advise against selling forward if they had no indication of whether there would be cover after September 24th. Mrs Hedley-Miller said that she saw no reason for private holders of sterling to start selling when the Chancellor had promised a second message and it was evident that great thought was being given to the problem.
3