Chris Giles examines the figures and finds new financial commitments to be lower than $100 bn

GORDON BROWN said that “this is the day the world came together to fight recession not with words but with a plan for economic recovery and reform”. He said the global fiscal stimulus, the largest “the world has ever seen”, amounted to $5,000 billion while there was another new $1,100 billion “programme of support to restore credit, growth and jobs”.

Figures at the end of any international summit need to be examined closely, particularly those presented by the UK prime minister. His reputation for numerical inflation, repeat announcements and double counting precedes him.

The emphasis on quantities rather than concrete agreements also serves to mask the big missing element in the communique: a new and binding commitment to specific measures to clean up the toxic assets of the world’s banking systems. On this, all the G20 agreed was that the countries would do the right thing. Rather than speeding up actions as the IMF had hoped, the leaders said: “We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions” in line with a framework agreed in mid-March.

The $5,000 billion fiscal stimulus figure is far from the discretionary stimulus sought by the US and the IMF. No new money has been committed and the UK Treasury, while trying to pin the figure on the IMF, said it related to the cumulative increase in government borrowing across the G20 between 2008 and 2010.

But how does the $1,100 billion total add up? Almost half – $500 billion – comes in the form of new money for the IMF so that it can guarantee it has enough money to lend to countries in crisis.

Japan unilaterally gave $100 billion last November, while the EU pledged €75 billion last month. There were no new commitments from the US, China or Saudi Arabia.

Instead there was a generalised pledge for a new financing scheme of $500 billion into which all these existing commitments and new money would be placed.

If the new commitments to the IMF were conspicuous by their absence, the $250 billion of new money in Special Drawing Rights – the fund’s own currency – was new but not all it seems. This policy of creating new SDRs, a currency basket based on the dollar, euro, yen and sterling, is the equivalent of quantitative easing on the global scale. The IMF will create the new $250 billion and will allocate this according to the voting shares its 186 members have in the fund.

The policy is significant because it represents new money that poor countries can turn into dollars, euros, yen and sterling, but rich countries will get most of this new foreign exchange reserve. The group of seven largest and most advanced world economies will get 44 per cent alone. Germany made significant concessions in agreeing to the new allocation of SDRs. It has traditionally opposed such moves because there are no strings attached to poor countries using the money and, in normal times, creating money is inflationary.

On trade finance, Mr Brown repeated a claim that 90 per cent of $14,000 billion of world trade is financed by trade credit, a figure under much dispute among trade economists at the World Bank, who point out that the original research from which the figure comes suggests trade credit and cash finance the trade.

Much trade is also within companies and so not reliant on trade finance. Even with those qualifiers, the $250 billion figure fails to stand up to minimal testing. An annex to the communique says that the new money committed is only $3-$4 billion and the $250 billion figure is an aspiration for the amount of trade that will be financed over the next two years.

The new $100 billion of lending by multilateral development banks is much closer to reality. Some of the money is being brought forward from the future but much of this lending will be financed by borrowing on the international capital markets.

When all the sums are added up, rather than $1,100 billion, the new commitments appear to be below $100 billion and most of those were in train without the summit. While the inflation of relatively small and old commitments into an enormous number does not render the summit a failure, the desire to produce large headline numbers as the main result of the gathering suggests the divisions and spats on other issues were considerable.

– (Copyright The Financial Time Limited 2009)