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number of facilities.
Once the troops had gone we would require a year
or two to dispose of our remaining assets. We shall thus at all stages
be dependent on the goodwill of the Singapore Government for an orderly withdrawal. They too will be dependent on us for economic aid, but in
the circumstances might not yield to threats to remove it as the price
of their co-operation.
21.
In the absence of any suitable regional defence organisation, Mr. Lee
will seek guarantees of Singapore's independence from the United States,
Australia and New Zealand, and while he is unlikely to get such guarantees,
his approaches will further embarrass our relations with those countries.
22.
We cannot guarantee that even if we provide massive econonic aid, we
can prevent widespread unemployment and economic disruption leading to
political unrest with the risk of a communist government. If this came
about Malaysia and possibly Indonesia would be tempted to intervene by
force, perhaps before our withdrawal had been completed. The intervention
could quickly assume an anti-Chinese character and lead to racial strife
in Malaysia.
23. A situation of this kind would put at risk our extensive commercial
interests in the area and adversely affect our future trading prospects,
both directly and also through the instability or decline of the local
economy which might ensue from our withdrawal. Both Malaysia and
Singapore hold substantial sterling balances and there is a possibility
that they night seek to diversify their holdings as a deliberate
retaliatory measure to our proposed rundown, though there would be no
economic advantage to them in such a step. We have achieved some degree of protection for our reserves from part of the effects of
fluctuations in the sterling balances through arrangements made last June
with a number of other Central Banks. Though these expire in June 1967 we hope to renegotiate then or replace then by some other, possibly longer term, arrangement. Nevertheless, a substantial withdrawal of sterling balances would be a material embarrassment, particularly if it led to similar action by other countries. There is, however, no sense in acceding to blackmail based on this threat, particularly because, once successful, it could be repeated, possibly several times, during the period over which we envisage the rundown as lasting, in further attempts to postpone stages of the rundown or otherwise influence our actions.
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