What the $1tn pledge really costs

Since the financial crisis came to a head we have had to get used to some very large numbers. The G20 summit has given us some more.

Once again, we are using the word "trillion", the one with 12 zeros. That's the headline figure for the financial firepower that the summit is aiming at the crisis.

What has been agreed by world leaders?

But it is not hard cash in the same way as it is when governments repair roads or send rebate cheques out to taxpayers.

The initial destination for a large part of this very large number of dollars is the International Monetary Fund (IMF).

But it is loans which will be used to offer more loans. The big IMF member countries are offering to lend money to the IMF - Japan has already done the deal. The IMF will then have more resources available to help countries if they are hit by the crisis.


HOW BIG IS ONE TRILLION?
Understanding one trillion

Big numbers explained

Since the crisis began, the IMF has made commitments to lend of about $60bn. It hasn't all been handed over yet, but the figures are rising fast.

Mexico is seeking a facility of $47bn. Mexico might well not need it all, but it adds up pretty quickly, when the IMF had lending resources of $250bn before the crisis.

Still they are loans and, apart from some recent special deals for the poorest countries, the IMF generally gets repaid in full.

'IMF-made money'

It gets even murkier when you look at the G20's proposal to create $250bn worth of something called Special Drawing Rights (SDR).


NEW FUNDING PLEDGES
$500bn for the IMF to lend to struggling economies
$250bn to boost world trade
$250bn for a new IMF "overdraft facility" countries can draw on
$100bn that international development banks can lend to poorest countries
IMF will raise $6bn from selling gold reserves to increase lending for the poorest countries
Source: BBC

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It is an IMF device for boosting countries' foreign exchange reserves and could help them weather the financial storms.

They could be described as obscure, but this huge - tenfold - boost in the total amount probably means they won't stay that way.

They are the nearest equivalent the IMF has to printing international money. They don't really take money away from one place and give it another.

And much of this IMF-made money might just hang around in foreign currency reserves as a kind of financial security blanket.

But that would be a useful function. The additional reserves would reduce the risk of a currency crisis.

Higher risk

Finance for international trade is another area where the figure is large but real spending will, with luck, be a lot less than the headline number of $250bn.

That support will come not in the form of grants but loans or guarantees - insurance for suppliers against the risk of not being paid.

The risk is higher just now, so when banks have become much more cautious trade credit has become especially scarce.

None of this is to say that these measures aren't worth taking or that they involve no real cost.

They may well be worthwhile and some will cost something. But unless thing get much worse they won't cost as much as the headline figure suggests.