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if we could go a little further and say that we are prepared to discuss with them some reduction of their MSP. Alternatively, we might say that we cannot decide yet on whether reductions in MSP would be permitted, but if the general response to the uni- lateral guarantee is good, then we would discuss the Hong Kong
MSP with them.
9. A particular problem arises with the sterling holdings of the commercial banks. Hong Kong say that they have already sold forward. If so, then the damage to us has already been sustained and we are that much better off. It will be important to us in considering the Hong Kong requests to know how much sterling the Hong Kong banks have in fact sold. The Bank of England have no means of telling this. I suggest that the Hong Kong authorities should be told that this is an important piece of information needed for our considera- tion of their request, and they should be asked to provide it.
10. We do, however, have some clues. If we take the Hong Kong authorities at their word that the forward selling of sterling by the commercial banks means that the Colony cannot maintain MSP after 24 September, this means that the commercial banks must have reduced their holdings of sterling by at least £100 million from the May levels. This figure of £100 million coincides with the estimate which Mr Haddon-Cave gave at the meeting on 10 August of the amount which the banks would wish to shed.
11. This suggests that the main problem with the commercial banks may already be behind us. There would be no point in making a special arrangement to try to hold in the remaining £200 million or so which the banks hold since, according to Mr Haddon-Cave's diagnosis on 10 August, they are likely to wish to retain it in any
case for their own commercial reasons.
12. There are very great attractions in leaving the commercial banks out of any arrangement altogether:-
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