TNAG-0333-FCO40-369-Visits-of-Secretary-of-State-for-Foreign-and-Commonwealth-Af-1972 — Page 62

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RESTRICTED

3. THE SECOND DIFFICULTY, HOWEVER, IS MORE FUNDAMENTAL. IT ARISES FROM THE FACT THAT, AS A PART OF THE PACKAGE NEGOTIATED AT THE TIME OF THE REALIGNMENT OF MAJOR WORLD CURRENCIES IN DECEMBER 1971, STERLING RETAINED ITS EXISTING GOLD PARITY AND THUS REVALUED AGAINST THE U.S. DOLLAR TO A RATE ROUGHLY EQUAL TO POUNDS STERLING 1 EQUALS U.S. DOLLARS 2.60. AT THE SAME TIME THE GUARANTEE UNDER THE STERLING GUARANTEE AGREEMENT REMAINED IN FORCE AT THE RATE OF POUNDS STERLING 1 EQUALS U.S. DOLLARS 2.40. IN OTHER WORDS, THE POUND STERLING COULD THEN FALL ALL THE WAY DOWN FROM US DOLLARS 2.60 TO U.S. DOLLARS 2.40 WITHOUT ANY ADJUSTMENT PAYMENTS HAVING TO BE MADE AND SUCH PAYMENTS WOULD ONLY BECOME DUE IF AND WHEN

STERLING FELL BELOW A RATE OF U.S. DOLLARS 2.49 TO POUNDS

STERLING 1.

4. THIS IS, IN EFFECT, WHAT HAS HAPPENED WITH THE FLOATING OF STERLING AND THE FIXING OF THE HONG KONG DOLLAR WITH THE U.S.

DOLLAR. STERLING HAS NOW EFFECTIVELY FLOATED DOWN FROM U.S.. DOLLARS 2.60 TO ABOUT U.S. DOLLARS 2.45, INVOLVING A LOSS ON HONG KONG'S STERLING RESERVES IN TERMS OF BOTH FOREIGN CURRENCIES AND HONG KONG DOLLARS. BUT, FOR THE REASONS I HAVE JUST EXPLAINED,

WE ARE MOT ENTITLED TO ANY GUARANTEE PAYMENTS UNDER OUR EXISTING

ARGEEMENT WITH THE UNITED KINGDOM.

5. SIR, THESE WERE THE PROBLEMS WHICH FACED US ON 6 JULY WHEN, IN ORDER TO AVOID A FORCED AND UNNECESSARY DEVALUATION OF THE HONG

KONG DOLLAR IN LINE WITH THE FLOATING RATE FOR STERLING, WE

TEMPORARILY FIXED A NEW CENTRAL RATE FOR THE HONG KONG DOLLAR IN

RELATION OF THE U.S. DOLLAR. AT THAT TIME WE WERE IN CLOSE TOUCH

WITH THE BRITISH GOVERNMENT AND, AT OUR REQUEST, THEY AGREED THAT THERE SHOULD BE VERY EARLY TALKS ON THE FUTURE OF OUR STERLING GUARANTEE AGREEMENT IN THE LIGHT OF THE NEW CIRCUMSTANCES THEN PREVAILING. AS HONOURABLE MEMBERS ARE AWARE, TWO OFFICIALS - ONE FROM THE TREASURY AND ONE FROM THE BANK OF ENGLAND - SUBSEQUENTLY ARRIVED IN HONG KONG ON 13 JULY: AND OVER THE FOLLOWING FOUR DAYS WE HELD DETAILED DISCUSSIONS WITH THEM ON ALL ASPECTS OF THE SITUATION CREATED BY THE FLOATING OF STERLING.

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./6. THE BRITISH