CONFIDENTIAL
010160 MDLOAN 16
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YEARS. HOWEVER, IT IS NOT CLEAR TO US WHETHER THE PROPOSAL IN PARAGRAPH 8.12 THE ISSUING OF SIX-MONTH PAPER ON A ROLLING BASIS - IS SO TIME SENSITIVE. IF THE COMMUTABLE PART OF THE PENSIONS WERE TO SPAN SAY 20 YEARS, WOULD THIS HAVE ANY IMPACT ON THE VIABILITY OF ISSUING SIX-MONTH PAPER ON A ROLLING BASIS?
6.
MARGOLIS ALSO SUGGESTS TWO OTHER SIMPLER WAYS OF DEPLOYING FUNDS, IF THE GOVERNMENT WAS WILLING TO COMMIT SOME FUNDS TO HELP OFFICERS. HE SUGGESTS EITHER DISCOUNTING THE FLOW OF RECEIVABLES OR A SERIES OF FORWARD EXCHANGE RATE CONTRACTS. BOTH THESE WOULD PROBABLY REQUIRE SUBSIDY FROM THE HONG KONG GOVERNMENT, OR AGREEMENT FROM THE OFFICERS CONCERNED THAT THEIR PENSIONS WOULD BE REDUCED BY A CERTAIN AMOUNT IN ORDER TO SAFEGUARD THEM. IT WOULD APPEAR, BUT WE SHOULD BE GRATEFUL FOR CONFIRMATION, THAT BOTH THESE PROPOSALS ARE VERY TIME SENSITIVE. IE, IF OFFICERS WHO WERE DUE TO RETIRE IN 20 YEARS TIME WISHED TO JOIN THE SCHEME, THE DISCOUNTING OF THE CASHFLOW WOULD BE EXTREMELY SEVERE AND/OR THE FORWARD EXCHANGE RATES FOR SUCH A LONG PERIOD WOULD BE VERY ADVERSE.
7. WE HAVE NOTED YOUR VIEW (A) THAT AN INTEREST RATE GUARANTEE COULD NOT BE SUPPORTED BECAUSE IT WOULD AMOUNT TO A GOVERNMENT SUBSIDY AND (B) THAT AN INTEREST RATE HEDGE COULD NOT BE SUPPORTED BOTH BECAUSE OF THE IMPLIED GOVERNMENT SUBSIDY AND BECAUSE OF THE IMPLICATION THAT THE GOVERNMENT HAD DOUBTS OVER THE FUTURE STRENGTH OF THE HONG KONG DOLLAR. HOWEVER, THERE IS A COMMITMENT TO RETURN TO THE CHINESE WITH VIEWS WHETHER IT IS POSSIBLE TO DO MORE TO REASSURE HONG KONG CIVIL SERVANTS ABOUT THEIR PENSIONS. ARE THERE OVERRIDING REASONS WHY THESE OPTIONS SHOULD NOT BE PUT TO THE CHINESE? IT IS LIKELY THAT THE TREASURY WILL ARGUE THAT THE PROPOSALS HAVE NOT BEEN PROPERLY TESTED UNTIL THEY HAVE BEEN PUT TO THE CHINESE. THE TREASURY ARE ALSO LIKELY TO ARGUE THAT, EVEN IF GOVERNMENT SUBSIDY IS RULED OUT, UNTIL THE OPTIONS HAVE BEEN PUT TO THE STAFF IT SHOULD NOT BE ASSUMED THAT THEY WERE UNWILLING TO ACCEPT SOME REDUCTION IN THEIR PENSION ENTITLEMENT IF THEY WERE THEN GIVEN THE REASSURANCE THAT THEIR PENSIONS WOULD INDEED BE SAFE.
8. WHEN (IF) WE HAVE THE BARINGS ADVICE FROM THE TREASURY, WE WILL FORWARD IT TO YOU SEEKING YOUR EXPERT VIEWS. GIVEN THE CURRENT TREASURY POSITION, IT WOULD BE WORTH CONSIDERING WHETHER YOU MIGHT GET A REBUTTAL FROM AN OUTSIDE EXPERT SOURCE PERHAPS WARDLEYS.
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