TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 78

CONFIDENTIAL

authorised banks, and for this reason were not given any compensation

in the first instance by the Hong Kong Government following devaluation.

But we did not stipulate during the sterling agreement negotiations

that such banks should be included, and in any case the offer has now

been made and is closed. Reference in the attached draft letter is

therefore intended not to criticise but to record our surprise that

the non-authorised banks have been included and to emphasise the need

to police the sterling holdings of these banks carefully, as is

already provided for in the arrangements, to exclude sterling bought

on the free market.

5.

Unfortunately, the arrangements offered to the commercial banks

are already in force. The letter was sent to the banks on

29th January; replies were required by 28th February; a copy of the

arrangements was not formally sent to us until 1st March, although we

asked to be told of the details of the arrangements in December. It

is, alas, typical of our relations with Sir J. Cowperthwaite that we

should have been given no opportunity to comment in advance on the

proposals which he has put to the banks. But Sir J. Cowperthwaite

would almost certainly question whether we had any right to be

consulted. In the negotiations with Hong Kong we agreed that the

Hong Kong Government might include in its official reserves deposits

with local banks, and we made no stipulation about the way in which

arrangements were made. These arrangements are between the Hong Kong

Government and the banks; we guarantee only the balances held by the

Hong Kong Government. However, we can argue that we have a right to

be assured that the Hong Kong Government does indeed hold the sterling

included in their advices, and can therefore question whether the

present arrangements give adequate assurance that sterling is, in fact,

held as counterpart of the deposits made by the Hong Kong Government

CONMENTIAL

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