XN000022-1972-12-13 — Page 39

15

-

Wednesday, December 13, 1972

since the end of May and largely due to an increased demand for cover from

the banks. Pending clarification of the British Government's intentions for

the future we told the banks that, whereas their 6th July sterling positions

would remain covered, further accruals would not be accepted for cover. By

this decision we at least limited the amount of bank sterling covered, since

honourable Members will appreciate that on all bank sterling guaranteed the

Exchange Fund remained at risk between US$2.6057 and US$2.40. Moreover,

the extension of the scheme to accruals would, in the absence of a fixed

Sterling/Hong Kong dollar rate, present considerable technical difficulties.

The British Government accepted that, in the new situation, we had no

obligation to add further bank funds to our total official external reserves

and with it an obligation to maintain a proportion (89%) of such further

additions in sterling.

July Talks and Later Contacts with London

Honourable Members will recall that soon after the British Government

decided to float sterling, six teams of officials were sent out to sterling

arca countries to discuss the future of the Sterling Guarantee Agreements in

the light of the new circumstances then prevailing. We held discussions with

the team which visited Hong Kong between 14th and 17th July. I was at pains

to point out to the team that, as sterling floated down from US$2.6057, the

value of our external reserves (which are largely in sterling) fell in relation

to other currencies and in terms of the Hong Kong dollar; and I put to the

British officials our views as to how our position should be protected, both

during the remaining period of the float and after sterling had re-fixed with

/the U.S.