TNAG-0337-FCO40-373-Visit-of-the-Chancellor-of-the-Duchy-of-Lancaster--Sir-Geoff-1972 — Page 40

CONFIDENTIAL

44/2/1

Mr RIPPON'S TOUR OF ASIA AND AFRICA, AUTUMN 1972

DEFENSIVE BRIEF:

THE STERLING AGREEMENTS

(Commonwealth Finance Ministers will be meeting in London on 21/22 September, and the Sterling Agreements and monetary reform are certain to be discussed. Further briefing may well be required for the later stages of Mr Rippon's tour, depend- ing on the outcome.)

1.

HMG has Sterling Agreements with all the countries Mr Rippon is to visit, except Bangaldesh, with whom we are currently negotiating one. Under these Agreements, which continue in force until September 1973, Sterling Area countries undertake to keep a certain proportion of their total reserves in sterling. The UK in turn has given a guarantee in dollar terms of the value of the bulk of these sterling holdings.

2. In the new situati on created by the floating of sterling, it was the UK's view that the existing Agreements required some technical adjustments; but in approaching OSA governments we have also taken the opportunity to propose some other modifi- cations and to suggest that revised Agreements be concluded to last until 1975, (by which time we hope that discussions on reform of the international monetary system will have proceeded sufficiently to allow for the consolidation of sterling holdings through the IMF). These discussions are continuing, and OSA countries have raised a number of points of their own. (These are summarised in a separate note.) One general problem however is that our dollar guarantee only applies if the rate for sterling remains for thirty consecutive days more than 1% below $2.40 (the sterling/dollar parity when the Agreements were made in 1968). Some OSA countries have argued that the guarantee level should have been increased to $2.60 following the Smithsonian Agreement last December. But we have rejected this view, and resisted any claims for "compensation" for the depreciation of sterling since the floating of the pound.

Financial Policy & Aid Department

August 1972