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Sevet & Personal

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Treasury Chambers Parliament Street

London SW1P 3AG

Telephone 01-930 1234 ext 164

18 January 1973

C P Haddon-Cave Esq

Financial Secretary Hong Kong

Dear Philip.

You will of course recall that when we talked in November about the future of the sterling agreements, a good deal was said about the possibility that we might not renew the guarantee after it expires in March, but should instead enter into "gentlemeng agreements" with the principal sterling holders. Yu saw some attractions in this and said that you would write to me about it.

Ministers here have been considering the future of the sterling agreements, but have not yet reached any decision. We shall need to make up our minds fairly quickly now and I hope very much that you will be able to let me have your thoughts about the "gentlemens' agreement" idea in the next few days.

To recapitulate what I said in November, this approach would be designed to take account of the emphasis that you and several other large holders have placed on having greater freedom to diversify than has been available under the guarantee arrangements. One could meet this by discontinuing guarantees, and, of course, the associated MSP provisions, and replacing the present arrangements by gentlemand agreements between the UK and a number of large holders about a programme of diversification that would be phased over a period of, say, two to three years. Under this approach, we would hope to be able to accommodate (unless the total seemed unmanageably large) the diversification that holders themselves wanted though one would want to arrange for it to be phased in, say, 6 monthly instalments over the period. It is also worth mentioning now that sales of sterling under these agreements could be made through the EEA, so as to insulate the market from the effect of the transactions.

If an approach of this sort proves fruitful the intention would be to announce well before the exploration of the present guarantee that the UK had reached understandings with the principal sterling holders about the way in which they would behave in regard to these holdings so as to avoid disturbing the exchange markets. The emphasis would be on the common recognition of sterling holders in not undermining the position of sterling. But the details of individual "gentleman's agreements" would not of course be made public.

SECRET AND PERSONAL

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