TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 3

Mr Aust (Legal Advisers, K157A)

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1

HONG KONG:

IMPLEMENTATION OF SIX MONTH GUARANTEE

1. We spoke. A problem has arisen in our absence because when we calculated the compensation due to Hong Kong, the sterling element in TOER used for the purposes of calculating the 10% deduction, was greater than the sterling element eligible for compensation, even though the latter contained no items such as equities which are ineligible for guarantee by definition The difficulty arose because, as you know, it was necessary to 'deem" the figure for Hong Kong sterling holdings for the purposes of calculating eligible balances if we were prepared neither to deny them compensation altogether nor to accept their interpret- ation of the "accidental breaches" provision.

2. The issues are set out clearly in Mr Walker's minute of 23 July, and his letter of 31 July to

Mr Cambridge. Both were based on the advice recorded in Mrs Denza's letter of 22 July to Mr Jones.

3. I should be grateful if you would confirm that you share Mr Walker's view of the legalities, as recorded in paragraph 5 of his letter, as opposed to what one might call the "commonsense" view of the matter which is set out in Mr Paton's letter of 30 July,

4. Hong Kong obviously share Mr Paton's view, and our own case does have certain presentational difficulties, not only for us, but also for the Hong Kong Government if it were to be called upon to explain it in EXCO. This means that any telegram to the Governor will have to set the matter in the context of the whole dispute, but first we must have your confirmation that our line is right.

Dihenty

D I Lewty

Financial Relations Department

31 July 1974

Cc: Mr Crowson (HKIOD)

CONFIDENTIAL

My Hanna

M. 7/imp.c.

helo