TNAG-0380-FCO40-426-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 97

SECRET

POLITICALLY VULNERABLE IF WE DID NOT SEEK TO PROTECT OURSELVES AGAINST AN UPSIDE/DOWNSIDE RISK SIMILAR TO THAT EXPERICENCES SINCE DECEMBER 1971 (1.E. A STRENGTHENING OF THE STERLING/U.3. DOLLAR RATE, COUPLED WITH A STRENGTHCHING OF THE HONG KONG DOLLAR/U.S. DOLLAR DATE, FOLLOWED BY A WEAKENING OF THE STERLING /U.S. DOLLAR AND THE STERLING/HONG KONG DOLLAR RATE). WE CAN ONLY DO

THIS BY REDUCING THE PROPORTION OF OUR EXTERNAL ASSETS HELD IN

STERLING.

3. UNTIL WE KNOW THAT H.M.G. ARE WILLING TO OFFER A GUARANTEE

WITH AN M.S.P. OF NO MORE THAN 70 PER CENT, THERE IS PROBABLY NO

ADVANTAGE IN OUR COMMENTING ON POINTS ARISING FROM THE CHANCELLORS MESSAGE, PARTICULARLY IN ADVANCE OF RECEIVING THE DRAFT TEXT OF THE DECLARATION APPLICABLE TO HONG KONG. HOWEVER, BECAUSE A SET

OF NEW AGREEMENTS IS PROPOSED WE SHOULD BE GLAD TO KNOW THE

PROCEDURE CONTEMPLATED FOR THEIR NEGOTIATION AND FOR SETTLING

SUCH NATTERS AS, FOR EXAMPLE,

(A) BALANCES ELIGIBLE FOR GUARANTEE: WE ASSUME THAT 100 PER CENT

OF OFFICIAL STERLING RESERVES WOULD BE COVERED?

(B) DEFINITION OF OFFICIAL STERLING RESERVES AS THE EXCHANGE

FUND GUARANTEE SCHEME EXPIRES ON 24TH SEPTEMBER, URGENT NEGOTIATIONS WOULD HAVE TO BE OPENED UP WITH THE BANKS

(C)

(D)

(E)

(F)

(G)

TO BRING IN THE STERLING ASSETS HELD BY THEM ON OR AFTER 26TH

SEPTEMBER. IF MAY BE TOO LATE NOW TO DO THIS ON TERMS ACCEPT-

ABLE TO THE EXCHANGE FUND:

TERMS OF IMPLEMENTATION WOULD THE SETTLEMENT BE CALCULATED

ON THE BASIS OF THE AVERAGE STERLING HOLDINGS THROUGHOUT

THE PERIO07

THE LIMITED M.S.P. CONCEPT : IS IT ENVISAGED THAT EACH

COUNTRY WOULD HAVE THE RIGHT TO OPT FOR THIS CONCEPT RATHER

THAN CONTINUE WITH THE CONCEPT LAID DOWN IN THE PRESENT

AGREEMENTS?

REVIEW : IN VIEW OF THE FOURTH SENTENCE OF PARAGRAPH 4 OF

THE CHANCELLOR'S MESSAGE, WOULD THERE BE PROVISION FOR BILATERAL DISCUSSIONS ABOUT FUTURE ARRANGEMENTS, IF ANY, BEFORE SAY 31ST JANUARY, 1974?

CURRENCY SUPPORT OPERATIONS : WOULD A STRICT ADHERANCE TO

M.S.P'S DE REQUIRED IN ALL CIRCUMSTANCES?

GILD-EDGED PRICES: IT WOULD NOT BE IN THE UK'S OR HONG

KONG'S INTERESTS FOR LARGE SALES OF GILT EDGED SECURITIES TO

2

M

SECRET

/OCCUR