XN000022-1974-11-13 — Page 30

WEDNESDAY, NOVEMBER 13, 1974.

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STERLING GUARANTEE WILL NOT BE EXTENDED

X X X X X X

THE STERLING GUARANTEE ARRANGEMENT WILL NOT BE EXTENDED WHEN IT LAPSES AT THE END OF THIS YEAR.

THIS WAS ANNOUNCED BY MR. DENIS HEALEY, CHANCELLOR OF THE EXCHEQUER IN HIS BUDGET SPEECH IN LONDON ON TUESDAY.

THE HONG KONG GOVERNMENT HAD BEEN INFORMED OF THE DECISION IN ADVANCE.

COMMENTING ON THIS DECISION, A GOVERNMENT SPOKESMAN SAID, +THE GOVERNMENT NATURALLY REGRETS THE LOSS OF A FACILITY WHICH HAS BEEN AVAILABLE AT HONG KONG'S CHOICE TO ACCEPT OR REJECT. BUT THE GOVERNMENT ACKNOWLEDGES THAT THE ARRANGEMENT WAS OFFERED AS AN INDUCEMENT TO PARTICIPANTS TO HOLD FUNDS IN STERLING AND HONG KONG HAS NO RIGHT TO EXPECT OR DEMAND THE CONTINUATION OF SUCH A GUARANTEE. THE GOVERNMENT WILL DECIDE THE DISPOSITION OF ITS EXTERNAL RESERVES IN FUTURE BY REFERENCE TO NORMAL CONSIDERATIONS OF INTEREST RETURNS AND EXCHANGE RISKS.+

THE SPOKESMAN ADDED THAT THE U.K. AUTHORITIES TAKE THE VIEW THAT THE GUARANTEE ARRANGEMENTS HAVE IN THE PAST MADE AN IMPORTANT CONTRIBUTION TO INTERNATIONAL FINANCIAL STABILITY, BUT THAT THEIR RELEVANCE HAS DIMINISHED SUBSTANTIALLY IN THE WAKE OF THE RECENT MASSIVE CHANGES IN THE INTERNATIONAL FINANCIAL SYSTEM. THE GUARANTEES WERE ORIGINALLY DESIGNED

IN 1968 TO ACHIEVE STABILITY OF EXISTING HOLDINGS OF STERLING. THE BRITISH GOVERNMENT BELIEVES, HOWEVER, THAT THE INTERNATIONAL DIMENSION OF THE PROBLEM OF CHANNELLING THE SURPLUS REVENUES OF THE OIL PRODUCERS HAS MADE THEIR CONTINUATION INAPPROPRIATE.

BACKGROUND NOTES FOR EDITORS:

THE FIRST STERLING GUARANTEE AGREEMENT CAME INTO EFFECT IN SEPTEMBER 1968. BRITAIN OFFERED ALL MEMBERS OF THE STERLING AREA, INCLUDING HONG KONG, A GUARANTEE IN TERMS OF US DOLLAR VALUE OF ALL OFFICIALLY HELD STERLING IN EXCESS OF 10% OF EACH COUNTRY'S TOTAL OFFICIAL EXTERNAL RESERVES. THIS WAS IN RETURN FOR THEIR UNDER- TAKING TO MAINTAIN A MINIMUM PROPORTION OF THEIR EXTERNAL RESERVES IN THE FORM OF STERLING. THE MINIMUM STERLING PROPORTION FOR HONG KONG WAS 99% AT FIRST, BUT IT WAS REDUCED TO 89.1% IN SEPTEMBER 1971. ARRANGEMENTS WERE MADE IN HONG KONG'S SPECIAL CASE TO BRING A SUBSTANTIAL PART OF THE COMMERCIAL BANKS' LARGE HOLDINGS OF STERLING WITHIN THE SCOPE OF THE GUARANTEE. STERLING'S WEAKNESS LATE IN 1972 CAUSED THE GUARANTEE TO BE IMPLEMENTED, AND THE U.K. PAID OUT SOME 59 MILLION POUNDS STERLING IN COMPENSATION, OF WHICH 15.3 MILLION POUNDS STERLING WAS HONG KONG'S SHARE. GUARANTEE AGREEMENT CAME TO AN END, AFTER FIVE YEARS, IN SEPTEMBER 1973.

THIS

THE UNCERTAIN WORLD OUTLOOK AT THAT TIME MADE IT UNLIKELY THAT PARTICIPANTS WOULD WISH TO ENTER INTO NEW LONG-TERM AGREEMENTS, SO THE BRITISH GOVERNMENT UNILATERALLY OFFERED A FURTHER GUARANTEE FOR THE PERIOD OF ABOUT SIX MONTHS ENDING 31ST MARCH 1974. THE TERMS WERE BROADLY SIMILAR, BUT THE STERLING HOLDINGS OF COMMERCIAL BANKS HERE WERE NO LONGER COVERED: REFLECTING THIS, HONG KONG'S MINIMUM STERLING PROPORTION WAS REDUCED TO 78%, ANOTHER PERIOD OF WEAKNESS FOR STERLING EARLY THIS YEAR LED TO FURTHER COMPENSATION PAYMENTS BEING MADE BY THE U.K. TO THE PARTICIPANTS, TOTALLING AEJUT 80 MILLION POUNDS STERLING: HONG KONG'S SHARE THIS TIME WAS LOWER, BECAUSE ONLY OFFICIAL STERLING HOLDINGS WERE COVERED.

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