TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 5

M J Thornton Esq Bank of England Threadneedle Street London EC2R 8AH

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CONFIDENTIAL

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H.K.od 1.0. Dar.

Treasury Chambers

Parliament Street

London SW1P 3AG

Telephone 01-930 1234 ext

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Ref: 2F(RMSA) 120/91/01

25 July 1974

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Dean Thornton,

HONG KONG:

IMPLEMENTATION OF SIX-MONTH GUARANTEE

I enclose herewith authorisation for payment of £9,755,451 to I also Hong Kong under the terms of the six-month guarantee. attach a draft of a suggested telex from the Bank to the Hong Kong Accountant-General, indicating that payment is being made.

2. We have briefly discussed the form of this message, but it may be as well for me to record the points I have in mind in drafting it in this way. First, it would be inappropriate to follow the normal practice of inviting Hong Kong to agree to the amount of the payment because, quite apart from the possible dispute about the computation of TOER (see below), Hong Kong has

Inviting not formally accepted the modified settlement basis. them to do so at this stage would unnecessarily rub salt into the wound. Second, there is a possibility, perhaps not more, that Hong Kong will accept the Treasury's approach to the TOER question without demur. I judge that the chances of this are greatest if the communication with Hong Kong is done in low-key through the Bank. We can, of course, engage in debate by official telegram at a later stage if Hong Kong complain.

3. You have indicated, and we have taken on board, that the Bank feel some unease about the Treasury's basis for determination of TOER. I respect the Bank's view, but disagree with it.

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4. The reason is quite simple. You will find that the Sterling Agreement of 1968 specifies that "unless otherwise agreed" "total official external reserves" shall have the meaning specified (paragraph 1(a)), and "official sterling reserves" shall have the meaning given in paragraph 1(b). The modified settlement basis relates explicitly and exclusively to the definition of "official sterling reserves" - it does not modify in any way the definition of "total official external reserves". In other words, in the absence of agreement to the

This is the oontrary, the 1968 definition of TOER applies.