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The numeraire could be the Hong Kong dollar, the U.S. dollar
or the average of the snake currencies.
Although the main objection
to a local currency guarantee could be removed by eliminating a
unilateral revaluation from consideration, at present such a guarantee
would be tantamount to a U.S. dollar guarantee to which the Hong Kong
dollar is linked. Furthermore, it is possible that from now on,
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subject to Watergate, the U.S. dollar may tend to appreciate more
the average of snake currencies.
Thus, from H.M.G.'s point of view,
a numeraire in terms of the snake currencies would seem to be the
appropriate yardstick particularly as it would tie in with possible
Any special guarantee for Hong Kong
future generalised arrangements.
would need to enter into force on 25th September and the market rate
for the snake currencies against sterling on that date would appear
to be the most appropriate rate for the guarantee.
As to the trigger,
although obviously a 1 trigger would be more attractive to Hong Kong,
the difference between that and, from H.M.G.'s point of view, the
preferable 24% would not be all that great in terms of the local
guarantee to the banks.
gross.
If one assumes the snake guarantee rate to
be the equivalent of £1=U.S.$2.50, a 1% trigger would imply payment of
compensation by Hong Kong to the banks of £47 min. gross (i.e. not
taking account of any settlement by H.M.G.) and a 24% trigger £51.9 mm.
However, this assumes the continuation of the local Hong Kong
dollar guarantee, which is not only so favourable to the banks that it
might affect their willingness to take up local paper but equally, if
not more, important it represents a continuing potential drain on the
Hong Kong Government's reserves which the authorities cannot afford.
For both reasons, therefore, Hong Kong at the very least should be
encouraged to wind up their present Hong Kong dollar guarantee and to
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Private notes are available after approval.