TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 86

CONFIDENTIAL ....

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Miss Pestell

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Reference... MF9/393/1...

RECEIVED IN REGISTRY 'o.i

-3 MAY 1974

158

1

STERLING GUARANTEE: HONG KONG

1.

HKK slio

Mr Marshall asked about Hong Kong tel No 467 (copy attached).

2.

You will recall that when the guarantee was extended last September Hong Kong had to be given

222.

کلتیس

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a revised MSP to take account of the withdrawal of the commercial banks' sterling from the guarantee arrange- ments. EXCO then instructed the Financial Secretary, in effect, not to increase the proportion of their reserves held in sterling. This operational require- ment to hold no more sterling than was necessary was to cause difficulties for Mr Haddon-Cave, when interest rates rose, because his portfolio contained large amounts of long-dated gilt-edged securities, which fell further than shorter-dated ones. He was unwilling to sell them and switch into shorter-term stocks, because that would have meant showing a capital loss, since he . would have had to sell at a lower price than he had

earlier bought them. And because Hong Kong had chosen to value their holdings on a market rather than on a "conventional" basis (in order not to have had to buy a bit more sterling to get their position right on the starting-date of the new guarantee period), there was always the possibility that when the time came for the end-monthly advices to be sent to the Bank of England, Hong Kong would be below MSP/MSH because the market-value of her sterling holdings had fallen. Thus in response to Hong Kong's request, we agreed in our tel No 1909 of 26 November 1973 that "the terms of the present Guarantee will not be abrogated in the case of a purely accidental failure to satisfy the provisions ... of the Declaration (relating to maintenance of MSP/MSH as a result of the changes in the value of holdings of securities arising from changes in market prices "(my underlining).

...

3. Gilt-edged continued to fall during the winter, and Hong Kong turned out to have been in breach of MSP/MSH in December and January. The Bank of England and, to a lesser extent, the Treasury, were deplorably slow in bringing this to our attention and Hong Kong's. When we informed Hong Kong, Mr Haddon-Cave's reply made it clear that he, regarded any breach of MSP resulting from a fall in gilts as "accidental" by definition, and that

he considered thank all he was required to do at the end of each month was

to buy the amount necessary to cover the shortfall,

GONZIDENTTAZ

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