SECRET
(a) The MSP should be reduced at once by a significant amount, say to 70%.
(b) There should be a promise to reduce it further to 50% in any future arrangement.
6.
In addition the Hong Kong authorities have made four other points on the offer which are not really consistent with one
another. Briefly they say:-
The Hong Kong banks would not want the guarantee. b) The guarantee is not very attractive because of the formula for calculating eligible balances. (c) Hong Kong could not meet the terms of the offer anyway because the commercial banks have been selling forward. The MSP could only be re-established by positive purchases of sterling which the Hong Kong Government is not prepared to contemplate.
(a) They do not like the limitation on the balances
eligible for guarantee.
7. I suggest that we should avoid trying to give answers to the Hong Kong points at this stage. Indeed we are not in a position to give considered answers since the se must depend, to a great extent, on a judgement about how far the unilateral guarantee is likely to be successful in stabilising the official sterling
balances as a whole.
8. However, I feel that, if some movement towards the Hong Kong position could be made, even in only very general terms, this might provide a great measure of relief to the Hong Kong political difficulty. The topic on which we are best able to make a conces- sion relates to the MSP. The general defensive brief for use with all sterling holders would allow us to suggest that individual concessions on MSP may be made if a strong case is presented. It would obviously be much more welcome to the Hong Kong authorities
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