FW
CONFIDENTIAL
CONCLUSIONS
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17. In reaching the decision on how much of the interest accruals and topping-up purchases can be allowed (paragraph 11 above), there are certain wider considerations to bear in mind. First there is the delay referred to above (paragraph 15) in picking up Hong Kong's original misunderstanding of the accidental breach provision, to which is now added the eight weeks which has now elapsed since the Bank received the Accountant General's letter of 6 May covering the end-March advises. importantly (but connected with this) there is the question of repercussions. While the full rigour of the modified settlement basis could safely be applied if Hong Kong were known, in any event to be about to diversify the whole of its sterling holdings, the
considerable position is different if there is a chance that diversification could instead be precipitated. To the extent that this is so, allowance of topping-up purchases beyond those needed to meet the deficiency can be regarded as a single premium insurance, £80,000 on balances of $300m, for example, being a premium of 0.03%, the premiums rising to 0.08% if, say, only £100m were thought to be at risk. ( £80,000 is the approximate compensation payable on the difference between the end-February deficiency of £6.8m and £8.9m, the latter being the sum of interest accruals, topping-up purchaser and the excess of receipts over payments).
18.
It is just possible that the Accountant General's letter of 6 May, which does not set down as a total the amount on which he expects Hong Kong to be compensated, was written in the hope rather than the expectation that the separate amounts itemized for interest accrued topping-up purchases and the excess of receipts over payments would be allowed. The purchases of sterling were, after all, in two large discrete amounts of $4m and £10m