14
Wednesday, December 13, 1972
Consequences of Temporary Link with U.S. Dollar
A decision to delay the re-establishment of a new fixed rate
between the Hong Kong dollar and sterling meant that the Exchange Fund
Guarantee Scheme with the Hong Kong banks could not be implemented and,
as the floating of sterling continues, we still do not know the extent of
the liability of the Exchange Fund to restore the Hong Kong dollar value of the banks holdings of sterling assets. But, so far, with the Sterling/US
dollar rate at around US $2.35 the cost is £46 an. (or HK $609 m.) less
about £9 m, in respect of payments due under the Sterling Guarantee
Agreement for the loss on 90% of eligible assets between US $2.40 and
2.35 and less about £1 mn., being charges levied on the banks for cover.
In other words, the net loss amounts £36 mn. Similarly, we do not yet
know the exact extent of the loss in the Hong Kong dollar value of the
sterling assets used to cover the note issue and the loss in the Hong
Kong dollar value of the sterling assets belonging to the General Account,
the Coinage Security Account and the Rehabilitation Loan Sinking Fund but, at US $2.35, the loss is about £38 mn. After allowing for compensation payments for the loss on 90% of the assets between US $2.40 and 2.35, which amounts
to £7 m. the net loss is about £31 min.
Meanwhile, we were concerned about the future: in the short term up to the re-fix of sterling and in the longer term. By 6th July, the day
on which we announced the linking of the Hong Kong dollar with the U.S. dollar,
total sterling balances amounted to about £900 mn.,
an increase of £97 mn.
/since