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3. Without prejudice to what is said above I should like to comment briefly on terms. We have already injected substantial subsidies into this market and shown considerable flexibility on terms for what was intended to advance our position to secure contracts on Hong Kong and China. When does the pay-off come when we secure a contract on what we regard as normal terms? If we proceed with cover on the Island Line project should it not be on terms dictated by us and determined beforehand, ie. in an acceptable currency, without capitalisation of pre-commissioning interest, etc?
Hong Kong Dollars
4. The general issue of financing in Hong Kong dollars was raised by Townley in his letter of 12 March to Kevan Watts, but this latest proposal has overtaken consideration of it. We see potential dangers in agreeing to HK % financing on a substantial scale, which would be roughly equivalent to one-month's lending volume in the Hong Kong market. This suggests that provision of all the finance in HK g would put the local money market under some pressure, thus pushing up interest rates and resulting in a potentially significant increase in IMU charges.
Increases in interest rates could have an adverse effect on the Hong Kong economy,
5. We suggest therefore that you should consider ways of alleviating the problem, should cover be agreed and HK$ become a crucial issue. One possibility would be to press for a currency option clause where the loans made are automatically converted to US $ in the event that the interest rate differential between HK and US increase above a given margin. Besides giving the HK market a safety valve such a clause would limit our IMU charges in relation to IMU charges on an equivalent US $ loan.
Conclusion
6.
I realise that you are under pressure to indicate cover for these contracts. But I feel the issues raised in this letter need proper consideration before we proceed further.
Your mindy, Michael Hi
M V Hawtin
cc.
KC Cotterill Esq ECGD
M Stephens Esq
ECGD
GE Breach Esq
ECGD
T JH Downing Esq.
BOE
GM Gowlland Esq
FCO
R Mathrani. Esq
DOT
GG Leader Esq
ODA
M Haworth Esq
MOD
J Priston Esq
DOT
J Woolmer Esq
DOT
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