CONFIDENTIAL
2F(RMSA)120/91/01
Mrs E Denza
Legal Advisers Department
Foreign and Commonwealth Office
King Charles Street
# LONDON SW1
Treasury Chambers Parliament Street
London SW1P 3AG
Telephone 01-930 1234 ext655
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22 July 1974
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Dear Mrs Denza,
STERLING GUARANTEE
In considering the Bank's recommendation on compensation payable to Hong Kong under the six-month guarantee we have met with a problem over the deduction to be made from official sterling reserves in the calculation of balances eligible for guarantee, and we should be very grateful for your advice. The purpose of this letter is to set out the relevant facts as I see them, together with the alternative courses of action which have been considered. The Bank are sending to us copies of several communications between them and Hong Kong and I hope to be able to let you have these shortly; they are in addition to the letters from Hong Kong to the Bank of 6 May, and 1 June, which are attached.*
2.
The recommendation made to us by the Bank carries into the figures for total reserves the adjustment to the end-March figures which is provided for official sterling reserves in the 'modified
Since settlement basis' (FCO telegram no. 358 of 10 April). eligible balances in September 1973 were lower than the modified end-March balances it is on the latter that, under the terms of the 1973 Declaration, compensation will be paid; and since holdings of sterling equities were nil the deduction to be made from official sterling reserves under paragraph (3) of the 1968 Sterling Agreement with Hong Kong is 10% of the relevant total official sterling reserves. 3. The Bank's calculation of total official sterling reserves for the purpose of the deduction consists of adding to official sterling reserves under the modified settlement basis actual non-sterling reserves held at end-March (both components being valued at end-March market prices). I understand that Hong Kong's initial implementation advice included instead actual total reserves at
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Though the 6 May letter does not itself contain information about the subject in question it covers one of the papers which I will
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