SECRET
B
XCS(74)1
(d)
(e)
(f)
- 6 -
the guarantee is based on the average effective depreciation of sterling from Smithsonian parities, rather than the average sterling/US dollar rate as under the previous Declaration. The effective depreciation is calculated by the Bank of England at noon each day as the average of the changes in the sterling rate against ten other major currencies, weighted according to the importance of the countries concerned in UK trade. (A fuller description of the calculation is at Annex B). The starting point for the guarantee is the average effective depreciation of sterling in the six-month period of the previous Declaration (18,35%, "the guarantee rate"), and compensation becomes payable if the average effective depreciation in the nine months to end-December ("the implementation rate") is greater than the guarantee rate. Any compensation is payable in sterling and would be calculated so as to restore the value of eligible holdings at the implementation rate to their value at the guarantee rate;
as mentioned in paragraph 7, the new Declaration carries forward similar provisions with regard to accidental breaches by Hong Kong of the obligations summarised in (b) above. However, the difficulties over the application of these provisions in the previous side-agreement arose partly as a matter of Her Majesty's Treasury's need, as the accounting department, to be able to justify the compensation payment by satisfying themselves that specified conditions had been strictly met. They agreed with us that the purpose of the guarantee is to insulate the sterling rate against pressure from switching out and it may be that they would be willing to modify the terms of the new Declaration before any question arises of establishing actual performance - in a way that would meet our difficulties without damaging the purpose of the guarantee;
other provisions relate to definitions, and advices required to be given to the Bank of England. They are minor, and broadly follow the terms of the previous Declaration.
9
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The guarantee rate under the new Declaration - a depreciation of 18.35% from Smithsonian parities represents a comparatively weak level for sterling: the effective depreciation since the Smithsonian settlement during the first half of this month has been in the range 16% to 17%. It was sterling's weakness during the same basis period which led to compensation becoming payable under the previous