G20 leaders seal $1tn global deal


Leaders of the world’s largest economies have reached an agreement to tackle the global financial crisis with measures worth $1 trillion (£681bn).  The deal came at a summit of G20 countries in London, called to discuss plans to beat the economic slump. We look at the details of the plan and whether it will work.

 What has been agreed by world leaders?

HOW BIG IS ONE TRILLION?
Understanding one trillion

The G20 has agreed to increase the resources available to the International Monetary Fund, which helps countries that get into difficulties, by $750bn. It is also contributing $250bn to help counteract the contraction of world trade and fight protectionism. And it has agreed tough new measures to regulate financial institutions, including sanctions against tax havens that do not disclose information.

Is there real substance in the deal or is it just hype?

There is some new real money in the deal, but not as much as the headline figure. Much of the $250bn in trade finance will come from existing programmes of export guarantees in rich countries, with only $50bn for poor countries. The proposal for $250bn in free money from the IMF is a dramatic new development – but only $19bn will be made available to the poorest countries. The reform of the financial system will be important, but only for the next crisis.

Will it revive the world economy?

On its own, the deal will only have a limited effect on the world economic downturn which is still gathering pace. Only some of the money given to the IMF will be lent out, and it will have to be repaid with interest. More important will be how far countries continue boosting their economies with fiscal stimulus. Gordon Brown said that would amount to $5 trillion by next year. And fixing the broken banking system, especially in the US, still hangs in the balance.

What was left out?

There was little discussion of the misalignments among world currencies, with a falling dollar and pound, which are worrying some countries. The Chinese proposal for a new international currency has been put on the back burner and will be discussed at a later date. The idea of global imbalances – ie the need for China to spend more and the US to save more, which some believe was the origin of the crisis – was also not mentioned.

 At a glance: G20 agreement

G20 world leaders have revealed their communiqué to tackle the global economic crisis. UK Prime Minister Gordon Brown announced the $1.1 trillion deal as he closed the G20 summit. Here is a summary of the key points:

FINANCIAL REGULATION
  • A new Financial Stability Board, with a strengthened mandate, will replace the Financial Stability Forum
  • Financial regulation and oversight will be extended to all financial institutions, instruments and markets
  • This includes bringing hedge funds within the global regulatory net for the first time
  • Members are committed to implementing tough new rules on pay and bonuses at a global level
  • International accounting standards will be set
  • Credit rating agencies will be regulated in order to remove their conflicts of interest
  • A common approach to cleaning up banks’ toxic assets has been agreed

 TAX HAVENS

  • There will be sanctions against tax havens that do not transfer information on request
  • The Organisation for Economic Co-operation and Development has published a list of countries assessed by the Global Forum against the international standard for exchange of tax information

 IMF

  • Resources available to the International Monetary Fund will be trebled to $750bn
  • This includes a new overdraft facility, or special drawing rights allocation, of $250bn
  • Additional resources of $6bn from agreed IMF gold sales will be made available for lending to the poorest countries
  • The G20 also supports increased lending to the world’s poorest countries of at least $100bn by the multilateral development banks

 GLOBAL TRADE

  • There will be a commitment of $250bn of support for trade finance made over the next two years
  • This will be made available through export credit and investment agencies, as well as through multilateral development banks
  • National regulators will be asked to make use of available flexibility in capital requirements for trade finance

 PROTECTIONISM

  • The G20 has pledged to resist protectionism
  • There will be a commitment to naming and shaming countries that breach free trade rules
  • The G20 will notify the World Trade Organization (WTO) of any measures that constrain worldwide capital flows
  • The G20 has called on the WTO to monitor and report publicly on these undertakings on a quarterly basis

 FISCAL STIMULUS

  • Although there is no new fiscal stimulus, Gordon Brown said G20 countries are already implementing “the biggest macroeconomic stimulus the world has ever seen” – an injection of $5tn by the end of next year.
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