CONFIDENTIAL
is likely, therefore, that projects may come forward which we shall have to turn down because of lack of ECGD cover.
Against this background, the competing arguments are as follows. The FCO and DTI believe that:
It will be hard to explain to industry why we are effectively preventing British companies from taking part in massive construction projects, particularly in a British Crown colony.
Failure to help British companies will be interpreted as lack of confidence in Hong Kong's future after 1997. We also understand that the Japanese Export Control Agency is considering stopping cover after 1997. It is unlikely that other countries will have confidence in Hong Kong if they believe that we do
not.
The Treasury argue that:
ECGD's exposure in Hong Kong is already £2.1 billion: equal to 8% of the total ECGD exposure and commitments, compared with a stock control review point of £650 million. Significant repayments on future credits would fall due after 1997, where the risk of default, the Treasury believe, will be higher.
ECGD's financial problems (an accumulated deficit of £4 billion and annual PSBR cost of £600 million) result from earlier large-scale concentrations of exposure.
The Foreign Secretary and DTI believe that we should not unduly restrict the prospects of British companies along the lines of the Treasury proposal. Instead they believe that cover should be available to support business in Hong Kong which satisfies ECGD's underwriting judgement. Existing arrangements by which the level of future cover would need to be reviewed once it reached £3 billion would, of course, stand.
I enclose a note on the timing for projects requiring decisions in this financial year.
I am copying this letter to Jeremy Heywood and Nicholas Holgate (HM Treasury), Martin Stanley (DTI), and Sonia Phippard (Cabinet Office).