TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 12

CONFIDENTIAL

framework. Specifically, it did not modify the basis for determining TOER, which is separate and distinct from that for determining

official sterling reserves.

FCO legal advice confirms this view.

14 I recommend accordingly that we proceed on this "correct" basis. This will save a further £40,000 over and above the minimum of £354,000 (paragraph 3 bove) ie yielding a total saving of £394,000 through application of the modified settlement basis.

15 There is a fair chance that Hong Kong will complain. Although we are clear on the "correct"view, matters of interpretation such as this are not beyond argument and Hong Kong could no doubt, if so

in minded, represent that she had been treated unfairly. Moreover, the normal routine contact between the Bank and Hong Kong on prepara- tion of the detail of this claim, the Bank indicated at working level (through a misunderstanding of the provision and of the Treasury's attitude to it) that they would recommend the Treasury to compensate on the basis of the Hong Kong advice as submitted. But the misunder- standing has not caused Hong Kong to act in any way to her detriment, and does not in any way bind the Treasury to compensate on a basis that we clearly regard as wrong.

16 If my recommendation on the substance (paragraph 14) is accepted, the Bank will notify Hong Kong of the amount of compensation as now. calculated, indicating in a deadpan way that the basis originally envisaged in the preparatory work on the claim was found to have been in error in respect of the calculation of TOER. If Hong Kong subsequently complain, we can of course respond at that stage on the official net but we do not want to incite a further debate by telegram if we can avoid it. The FCO agree with this view.

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(D A WALKER) 23 July 1974

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