TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 83

SECRET

STERLING ARRANGEMENTS:

HONG KONG

1.

AUSTRALIA, IRELAND

This paper discusses problems that have been raised by Australia, Ireland and Hong Kong on the terms of IMG's unilateral offer, and suggests ways of dealing with them.

Australia

2.

Australia cannot comply with the terms of the offer as they now stand without buying some £80 million of sterling, which Australian officials have indicated that they are not prepared

to do. This shortfall arises because of a change in the valuation basis between the former Agreement and the present unilateral offer. Australia formerly complied with ita MSP obligation on a basis that involved the use of Smithsonian parities for the sterling valuation of official foreign exchange holdings. The unilateral offer provides for conversion of foreign exchange holdings at market rates, thereby increauly the sterling value of Australia's total official external reserves and thus the official sterling holding required to satisfy HSP,

3. The main reason for the specification of the market rate basis in the unilateral offer stems from the change in the excherge

rate situation: in the event that the guarantee were implemented the parity basis of conversion would now involve an appreciably larger sterling payment by the UK than the market rate basis. The market rate basis is thus preferable from the UK standpoint, and it would now be difficult to justify making payments on ny

other basis.

•

But in framing the unilateral offer on a market rote basic it was not the intention that Australia (or any other holder) would have to buy sterling in the market to permit compliance with the terms of the offer. The Australians have not been slow to point this out. Fortunately, there is the possibility of t compromise that satisfies both sides. This would consist of

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