CONFIDENTIAL
"necessary" topping-up as appreciated later. There appears to be no doubt that these purchases were made in good faith, and it is noteworthy and satisfactory that no suggestion has been made by Hong Kong that the further £10 million which was purchased on 29 March should qualify for settlement under the modified formula.
J
10 FCO legal advice is similarly that it would be difficult for HMG to defend taking a hard line in the face of Hong Kong argument that the relevant purchases were undertaken in good faith.
11 In the circumstances, my conclusion is that we do not in practice have a real option and that the right course is to compensate on the £8.9 million of purchases plus accruals registered in March, forgoing the extra saving of some £80,000 that would accrue if we compensated only on interest accruals plus "necessary" topping-up.
10 per cent deduction
12
Le Lord hean told
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The advices submitted by Hong Kong show total official external reserves (TOER) as comprising the sum of non-sterling reserves plus
That is, official sterling reserves on the basis described above. they include the February topping-up purchases of £4 million but exclude the further £10 million purchases on 29 March at a time when Mr Haddon-Cave (mistakenly) thought that we might be persuaded to compensate on the full amount of his March purchases. The level of TOER matters for the purpose of implementation because the higher the TOER, the bigger the absolute amount of the 10 per cent deduction.
13
Hong Kong's assumption (or hope) in submitting a figure for TOER which excludes the £10 million purchased on 29 March is that the modified settlement basis modified not only the basis for determining This is a misunder- eligible balances but also the coverage of TOER. standing. The modified settlement provision was devised solely and exclusively to "deem" an artificial figure for official sterling reserves "for the purpose of calculating the balances eligible for guarantee.....". It did not modify other features of the Declaration
1