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1007
DESK BY 2908COZ
20 OCT 1983
FM HONG KONG 290515Z SEP 83
DESK
TO IMMEDIATE FCO
INDEX
TELEGRAM NUMBER 1435 OF 29 SEPTEMBER
STRICTLY PERSONAL FOR CLIFT (HONG KONG DEPARTMENT) FROM BREMRIDGE.
THE TWO PAPERS FROM MONETARY AFFAIRS BRANCH ARE AS FOLLOWS:
THE
THE EXCHANGE RATE.
See
1. FIRST H DO NOT BELIEVE THAT THERE CAN BE ANY REAL DOUBT AS TO THE VALIDITY OF THE SCHEME (NEXT TWO WORDS UNDERLINED) IN PRINCIPLE. ALAN MCLEAN AND HAVE HINDEPENDENTLY SPENT A LOT OF TIME THINKING IT THROUGH, AND NOW STEPHEN CHEUNG APPEARS TO HAVE ACKNOWLEDGED THE THEORY. IN OTHER WORDS, THE SCHEME CAN **WORK''. 1: UNDERSTOOD YOU TO SAY THAT PETER HAMMOND HAS SAND THAT T WOULD NOT WORK, BUT IF HIS WIEW IS BASED ON ANYTHING LIKE THE SAME RATHER CONFUSED PERCEPTION WHICH APPEARED IN A LETTER FROM PETER WRANGHAM TO SMA YESTERDAY (WHICH SAW ONLY VERY BRIEFLY), THEN HIS OBJECTION DOES NOT STAND UP. OF COURSE, THE CRUCIAL QUESTION CONCERNS THE (NEXT WORD UNDERLINED) PRACTICAL MANIFESTATION OF THE SCHEME IN TERMS OF MONETARY AND REAL ECONOMY CONSEQUENCES. IN THIS RESPECT CHEUNG'S WARNING COMES AS NO SURPRISE. THE POSSABILITY OF A SEVERE CONSEQUENCES IS ADMITTED IN PARAGRAPH 14 OF MY PAPER, AND SAND WHEN I SAW YOU YESTERDAY THAT THIS ASPECT REQUIRED STILL GREATER EMPHASHS. MCLEAN 4S OF THE SAME OP:μN LON. THE POINT IS THAT THE CONSEQUENCES COULD BE EXTREMELY SEVERE IF THE PUBLIC AND THE MARKETS DID NOT BELIEVE THAT THE RATE WOULD HOLD. IT IS PROBABLE, HOWEVER, THAT AFTER AN INITIAL SPELL OF UNCERTAINTY THE SQUEEZE WOULD QUITE SOON EASE, PROVIDED THAT WE HELD THE LINE. MONEY MIGHT REMAIN TIGHTER AND INTEREST RATES HIGHER (COMPARED WITH THE SITUATION WITHOUT THIS SCHEME), BUT NOT NECESSARILY TO AN INTCLERABLE DEGREE (ON THIS POINT GREENWOOD IS CONSIDERABLY LESS WORRIED THAN ETHER MCLEAN OR MYSELF).
2. AS SEE IT, WE HAVE A STRAIGHT CHOICE BETWEEN ALLOWING THE EXCHANGE RATE TO SPIRAL DOWNWARDS INDEFINITELY, WITH REPEATS OF THE PANIC SEEN AT THE END OF LAST WEEK, OR INTRODUCING THIS SCHEME AND RIDING CUT THE MONETARY CONSEQUENCES. THESE CONSEQUENCES ARE LIKELY TO BE LESS SEVERE, THE LESS AMBITIOUS THE RATE WHICH IS SET. IN OTHER WORDS, IF WE ARE PARTICULARLY NERVOUS, WE MIGHT CHOOSE 6.00. EVEN THIS WOULD FULFIL OUR ANNOUNCED HOPE OF RESTORING STABILITY AT A RATE CLOSER TO THAT JUSTIFIED BY FUNDAMENTALS THAN WHEN THE STATEMENT WAS MADE ON SUNDAY.
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