§ The Chancellor of the Exchequer (Mr. Denis Healey)
With permission, I shall make a statement.
I told the House on 15th December that the Government have been concerned to remove the pressures exerted on the exchange rate by the overhang of the sterling balances. Other countries share our view that fluctuations in the official sterling balances have been disruptive not only to British economic policy but also to the international monetary system.
The House will be glad to know that the discussions we have held on this subject resulted yesterday in a broad agreement between Central Bank Governors in Basle on the setting up of a facility for the official sterling balances. A statement announcing this agreement was issued last night by the Bank for International Settlements in Basle.
The purpose of the agreement is not only to achieve greater international monetary stability and to ensure that sterling and the exchange markets cease to be affected by pressures associated with any rundown of the official sterling holdings but also to enable the British Government to achieve an orderly reduction in the rôle of sterling as a reserve currency.
The agreement will in no way reduce the existing freedom of non-resident sterling holders to manage their holdings as they wish. The Government will, however, be offering official holders the option to convert any part of their holdings in sterling into negotiable medium-term foreign currency bonds to be issued by Her Majesty's Government on market-related terms.
The new facility, which will be available as soon as all the technical details have been worked out, is for a total 1261 amount of $3 billion. It will be operated by the Bank for International Settlements, with the support of central bankers in other Group of Ten countries and Switzerland. Over a two-year period the United Kingdom will be able to draw on the facility in respect of any net reductions in the official sterling holdings from December levels, other than reductions arising from conversion to the foreign currency bonds. There is also provision for an extension of the draw down period for a third year, if all the participants agree. Repayment will be over a period of four years from the end of the draw down period.
The facility covers only official sterling balances because it is these that have been the unstable element in recent years. But the United Kingdom would not wish large new inflows into private holdings to be a means of financing the United Kingdom balance of payments deficit on current account.
As the statement by the Bank for International Settlements makes clear, this agreement has been possible because there has been general approval of our economic and financial policies as set out in my letter of 15th December to the managing director of the International Monetary Fund. The new facility for the official balances assumes that these policies will be continued. The managing director of the IMF has been associated with these discussions and has been asked to assist in implementing the agreement.
I will in due course make available to the House further information about the technical aspects of the agreement. The terms of the foreign currency bonds to be offered to sterling holders will also be made available at a later stage. In the meantime I am sure the House will agree that the establishment of this new facility will make a powerful contribution to the stability of the international monetary system as a whole and reduce the vulnerability of the British economy to external factors beyond its control. I should like to express our appreciation to all those who have made it possible. It makes a good start to the New Year.
§ Sir G. Howe
Is the Chancellor aware that the House would not wish to deny him the satisfaction that he gains from making this announcement today but that there are a number of aspects that the 1262 House would want to look at with interest? In particular, we should like to know what the right hon. Gentleman can tell us about the rates of interest likely to be payable, whether under the standby or under the foreign currency bonds.
Is the right hon. Gentleman also aware that we recognise it as an improvement on the agreement negotiated in 1968 by the previous Labour Government that there is no guarantee of the exchange value of sterling holdings to future holders, as there was at that time?
However, does it not follow, even so, that the country is still undertaking an obligation to offer foreign currency bonds to present official holders at a value that will he maintained whatever happens to sterling and that they will therefore get the benefit of any appreciation in sterling rates that may take place but that we shall have to compensate them substantially if there is any further decline in the value of sterling? Is it not a fact, despite what the Chancellor of the Duchy of Lancaster says, that we shall have to compensate them through foreign currencies if there is a decline in the value of sterling in the years ahead? Does that not underline the need for continued competence in the management of our economy under the supervision of the International Monetary Fund, because any further loss of confidence could certainly cost us dear in this respect?
Will the Chancellor say whether this announcement means that there will now be an end to any further borrowing by the nationalised industries and the public sector with benefit of guarantees against exchange control losses of the kind that we have seen over the last year or two?
Finally, does not the fact that this agreement has now been entered into underline the need not a repeat the folly of the period 1974–76, when the Chancellor so foolishly rejoiced at the temporary inflow of funds the sudden withdrawal of which was the cause of the dreadful tribulations of the last three months?
§ Mr. Healey
I am glad for the right hon. and learned Gentleman's sake that he did not seek to rob the Government or the country of their satisfaction at the conclusion of this agreement, because I doubt whether anything that he could 1263 have have said would rob us of this satisfaction.
The rates of interest on the foreign currency bonds which will be made available to existing official holders will be roughly half the rates of interest on existing sterling deposits, but the precise level of interest rates, as I say, will be stated in relation to the particular currencies made available in a paper that I shall later submit to the House.
The rate of interest on drawings on the standby will be about 5 per cent.—that is, 9 per cent. less than the rate of interest on existing holdings. The House and the country should recognise, therefore, that in terms of interest as well as in terms of the stability of replacing volatile short-term berrowings by stable long-term borrowings, this is a very good deal indeed for the country.
I think that the right hon. and learned Gentleman is right in saying that this is an improvement on the 1968 agreement because there are no guarantees to existing sterling holders, and of course. I would agree with him. The right hon. and learned Gentleman will recall that the purpose of the 1968 agreement was to guarantee the then existing sterling holdings.
As to the right hon. and learned Gentleman's last remark, let me remind him that it was his Government, in 1973, who started the policy of borrowing abroad by the nationalised industries. They made roughly $1 billion worth of medium-term borrowing, and I have no reason to give up this type of borrowing if it proves to be suitable for our purposes.
On the question of the build-up of balances in 1974, I am bound to remind the right hon. and learned Gentleman—and this was a factor in our negotiations—that most of our friends abroad were very disappointed that the previous Conservative Government, of which he was a member, did nothing to implement the undertaking given by the right hon. and learned Member for Hexham (Mr. Rippon) to seek an orderly rundown of the sterling balances, and in fact the sterling balances rose by one-third, by nearly £1 billion, in the two years following an undertaking by the previous Government to reduce them.
§ Mr. Healey
No. It is our intention, as the Prime Minister and I have made clear on many occasions, to do our best to reduce existing holdings, but we can give no undertaking as to the take-up of foreign currency bonds, because we wish to leave existing holders entirely free to decide whether to leave their money in sterling here, to take it out, or to replace their holdings with foreign currency bonds.
§ Sir G. Howe
Perhaps I may return to a technical point, which is of some importance. The Chancellor has said that there is no guarantee for future official sterling holders under these arrangements. I follow that entirely. However, is it not right that the offering of an option to present official holders to convert any part of their holdings in sterling into foreign currency bonds to be issued by the Government means that the Government underwrite the foreign currency value of present official sterling balances? It is important that that should be understood, and that is how I understand it.
§ Mr. Healey
With great respect, since the 1968 agreement, all the world's currencies have gone on to floating rates, so it is not open to any country in the world to guarantee the particular value of any bond, however denominated, in terms either of other currencies or even of its own.
§ Mr. Pardoe
Is the Chancellor aware that we welcome this announcement as a sign that at last a British Government intend to end the reserve rôle of sterling? But is he also aware that successive Governments have announced their intention of doing so over several years and have always run away from it? How sure can we be that this will be carried out? On a technical point about the bonds, what does the right hon. Gentleman mean by "medium term"? Will they be capable of being liquidated in case of need by the holders? If not, what is their attraction to foreign countries?
§ Mr. Healey
In the first place, as I said, I will give the House details of these bonds at a later stage. The rate of interest, as I have said, will be market-related—that is to say, related by the market to the interest now available on the currencies in which the bonds are issued. Most of the bonds will be issued in dollars but I hope that some will be issued in other currencies. The term of the bonds is one of the details which are now under discussion and which I will convey to the House at a later date. The bonds will be fully marketable.
§ Mr. Wrigglesworth
Will my right hon. Friend accept our congratulations on the success that the Government have achieved in overcoming this problem, which has done so much damage to the British economy in recent years? Would he say more about the private balances? Is he taking any steps to ensure that there is no growth in those balances and therefore that there is no backdoor seepage of official balances into this sector, from Europe or from other sources?
§ Mr. Healey
I thank my hon. Friend for his congratulations. I think that this announcement will be widely welcomed in the country, irrespective of party. As for seepage, the Government are concerned, as are all participants in the facility, that there shall not be a shift of official holdings into private holdings under some sort of disguise. We are concerned to avoid that. We shall seek to avoid a build-up in private holdings, but my hon. Friend will know that none of the countries which have sought to prevent, and have had some success in preventing, a build-up in that type of balance, has had full success. That is why I cannot guarantee full success in this regard. The really important thing is that we undertake not to use any buildup in private holdings which may take place to finance our current account deficit.
§ Mr. Powell
Is the right hon. Gentleman aware that it cannot be in the public interest that foreign Governments who own British Government debt should be protected against all or part of the consequences of a depreciation in the value of that debt—either at our expense or at anybody else's? The right hon. Gentleman referred to the Government's intention to endeavour to avoid an increase in 1266 private holdings of British Government debt and to avoid that increase coming into the balance of payments. How can he do that?
§ Mr. Healey
The right hon. Gentleman will know that other countries have faced this type of problem—Germany, Switzerland and France in the less recent past—and that they have all had some success by various methods in dealing with the problem of that build-up in private holdings. However, as I said, none has had full success.
§ Mr. Tapsell
Is the right hon. Gentleman aware that it is very difficult for the House to assess the value of these proposals until we have far more technical details and that the key is how future official deposits in sterling will be treated? For instance, taking the example of a British Government-guaranteed National Coal Board issue quoted at present in dollars and yielding a little over 8 per cent., and comparing that with a comparably dated British Government security yielding at present a little over 14 per cent., when this new foreign security bond has been issued, how will depositors be treated as the differential between the US dollar and sterling varies?
§ Mr. Healey
That is exactly the point I made in reply to an earlier question—that the idea that any guarantee of the value of the security can be given in any currency disappeared when the whole world went on to floating rates. There is no longer any measure against which a guarantee can be given. I know that the hon. Gentleman has some difficulty in appreciating the value of the agreement, but I do not think that hon. Members on this side have any difficulty. Nor has the Liberal Party—nor, I am glad to say, have the international markets.
§ Mr. Healey
It is possible that France and Italy, which are the two members of the Group of Ten who have not so far joined the agreement, may do so later, but it is well known that those 1267 countries have some economic problems similar to our own.
§ Mr. Lawson
Is not the Chancellor aware that he has got himself into something of a muddle here? Is it not the case that any sterling holder who exercises his right to convert, say, into dollar bonds, is thereby guaranteed against any subsequent depreciation of the pound against the dollar—and guaranteed by the British Government? Is it not further the case that it was this implicit guarantee or right to acquire a guarantee which persuaded those countries to enter this arrangement?
§ Mr. Healey
Of course, if a man borrows in dollars, he is not guaranteed sterling in dollars: he simply has a dollar bond. No doubt countries which at present hold sterling balances will calculate carefully whether sterling is likely to move up against the dollar, as it has done in recent months, or move down against the dollar, as it has in the more distant past.
§ Mr. Gould
My right hon. Friend is certainly entitled to congratulations, but is there not a real danger that we shall end up, in the short term at any rate, with an exchange rate which will kill stone dead all export-led growth? Is not the Bank of England's unwillingness to let interest rates fall a very bad omen in this respect?
§ Mr. Healey
No, Sir. My hon. Friend and I have had many exchanges on this matter, but I would refer him again to the pellucid clarity of my statement on the Government's exchange rate policy in my recent letter to the managing director of the IMF. He will see from that statement that his fears are unjustified.
§ Mr. Ian Stewart
How on earth will the right hon. Gentleman reduce the reserve currency function of sterling?
§ Mr. Healey
I have just been explaining that to the House over the past quarter of an hour. I suggest that the hon Gentleman reads Hansard tomorrow.
§ Mr. Higgins
Will the right hon. Gentleman confirm that, following the completion of this agreement, there will be no outstanding guarantees to any foreign holders of sterling? Is it not the 1268 case that if bonds are issued denominated in a foreign currency the responsibility for paying those—the capital sum and the interest—will be higher if the sterling rate subsequently depreciates?
§ Mr. Healey
On the first point, I can give a categorical assurance that that is so. On the second point, what the hon. Member says can be argued to be true—in the form in which he put the point—but the important point is that which I made earlier, that the rate of interest paid on foreign currency bonds will be about half that which is paid on existing holdings. In addition to a very much lower rate of interest, we shall have the advantage of stable, medium-term deposits, as against very volatile short-term ones. It is a very nice question where the balance of advantage would come down in any particular movement of the sterling rate.
§ Mr. Emery
Would the right hon. Gentleman make it clear that this statement should do nothing to discourage international business from being conducted in sterling or the financing of exports and imports throughout the world in sterling? Both are most important to this country. Second, would he say something about the maturity dates of these bonds, because that is the hidden catch to the benefits? Third, is it not something of a condemnation of the Government that to lend in sterling one has to pay twice as much as if one lends in another currency? Will the right hon. Gentleman therefore be working to bring the interest rates of the two types of currency exactly into line?
§ Mr. Healey
I hope that the balances, both private and public, held in London will end up as normal working balances, financing normal transactions. That is already the case with private holdings, which have risen, not fallen, over recent years. They have not tended to rise above what is required as normal working balances. I hope that the official holdings will fall to the level required for normal working.
But I do not think that it is in the country's interest that we should use sterling to finance all international transactions. That is why I put a prohibition on the use of sterling for trade between third parties. This has already produced a helpful reflux of money into this country in recent weeks.
1269 With regard to the maturity question, I have said that details of the bonds will be given to the House when they are available.
§ Mr. Ronald Bell
Is it not difficult to assess the value of what the Chancellor has said without knowing more of the details? For example, does the option between sterling and a foreign currency persist through to maturity or is it exhausted at the time of choosing the foreign currency bond? If a holder of sterling chooses a foreign currency bond, do the Government propose to fund their foreign exchange liability at the time the bond is taken up or to defer that obligation until the maturity of the bond?
§ Mr. Healey
If an official holder decides that he wants to convert an existing sterling holding into these foreign currency negotiable bonds, he will do so, and in doing so will liquidate the Government's existing sterling obligation. That is what conversion implies. I shall give the House details of the bonds at a later stage.
I am a little perplexed by the Conservative Opposition's difficulty in making up their mind on the value of this arrangement, when the international money markets have had no difficulty whatsoever in doing so. The Opposition would gain more credit in the country if they were prepared to give credit where credit is clearly due.