TNAG-0333-FCO40-369-Visits-of-Secretary-of-State-for-Foreign-and-Commonwealth-Af-1972 — Page 58

CONFIDENTIAL

MR PETER BLAKER'S PQ TO THE SECRETARY OF STATE

STERLING AGREEMENT

(BACKGROUND NOTE

I. The Sterling Agreements came into force on 25 September 1968

and are between the United Kingdom and many of the governments

of the overseas sterling area. They provide for a guarantee in

terms of the US dollar of Sterling Area countries' official

sterling holdings, Under them compensation is payable if the US dollar/pound sterling rate falls more than 1 per cent below $2.40

to the pound provided that they maintain a minimum proportion

(MSP) of their reserves in sterling. The MSPs are broadly based

on the actual sterling proportions at the time when the Agreements

were concluded. Hong Kong's MSP is 89 per cent.

2. As well as concluding the Agreement with the UK guaranteeing

sterling reserves in dollar terms the Hong Kong Government has

made arrangements with the local banks providing for sterling held by the banks (against Hong Kong dollar liabilities) to be guaran-

teed in terms of the Hong Kong dollar. This was done because,

in the absence of a central bank or Monetary Authority, the banks

perform functions of market intervention on behalf of the Govern-

ment. The Hong Kong dollar remained fixed to sterling in the

December 1971 realignment, and thus the Hong Kong Government

became exposed to exchange risks under its guarantee arrangements

with local banks in respect of which the Sterling Agreement

(based on $2.40) provided no offsetting cover.

3. Hong Kong was, therefore, one of a number of OSA governments

which approached us when the exchange rate was fixed at $2.60 to

CONFIDENTIAL

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