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Wednesday, December 13, 1972
maintain a liquidity ratio (cash/deposits) of 25%. As there are very
few forms of liquid assets available internally (there is, for example,
no short term Government debt as a vehicle for liquidity) this means that
the banks have to maintain substantial external reserves.
After the devaluation of sterling in November 1967, the British
Government was faced with a possible break-up of the sterling area and
yet was unable to finance a substantial movement out of sterling into
other foreign currencies such as U.S. dollars, because of Britain's own
depleted reserves, and the fact that the devaluation took a long time to
bring the balance of payments into surplus. So a line of credit of U.S.
$2000 mm. was negotiated with the Group of Ten (the so called Basle
Agreement) which in turn enabled a free guarantee, to be offered by the
British Government, of the U.S. dollar value of their official sterling
reserves to all members of the sterling area, including Hong Kong. This
guarantee was in respect of all officially held sterling in excess of 10% of
each country's total official external reserves. The guarantee was offered
subject to each country maintaining a minimum proportion of its reserves in
sterling, roughly the proportion in sterling when the offer was made,
For some countries the guarantee was for three years and for others (including
Hong Kong) it was for five years from 25th September 1968,
/The Two