TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 48

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of a straight guarantee of balances in a way which would seem likely

to tie in with any generalised arrangements which may eventually be

offered to Agreement countries.

In brief a guaranteo -

(a) of all Government sterling but only part of the banks'

sterling, the balance of the latter being sold to

Government in exchange for local paper;

(b) to be based on the average rate of snake currencies on

25th September with a 21% trigger and applicable to

100% of eligiblo balances;

(c) conditional on the Hong Kong Government issuing local

paper at a realistic rate of interest not far below the

yield on sterling short-term assets which the Hong Kong

dollar paper would roplace. This is of the essence of

the arrangement to ensure that such a risk-froe asset

would be attractive to the banks and others thus

hopefully resulting in an active secondary market which,

ceteris paribus, should ensure minimum recourse to a lender of last resort (the Accountant General pending

banking reform);

(d) possibly also conditional on the Hong Kong Government

winding up their internal Hong Kong dollar guarantee -

which is too favourable to the banks and might act as a

disincentive to the take-up of local paper and

substituting a new guarantee of bank sterling an

precisely the same terms as those in II.M.G. s possible

Furthermore, the Hong Kong Government

new guarantee.

should be encouraged to offer to pay compensation under

their present guarantee in the form of local paper in