FACTBOX: G20 mobilizes funds for trade finance

(Reuters) - World leaders agreed a package to fund $250 billion in trade over two years at the G20 summit in London on Thursday.

The package tackles one of the most urgent problems in the current economic crisis -- the drying up of trade finance.

WHY TRADE FINANCE MATTERS

Trade finance is money lent by banks to exporters and importers to finance the shipment of goods. It is the oil in the wheels of the global economy.

Trade officials estimate that it covers about $10 trillion of the $15 trillion in world trade, although precise figures are unavailable.

Most trade finance instruments, such as letters of credit, are simple forms of lending, some dating back hundreds of years. They are also among the safest for the banks involved, because they are short-term, the banks know the exporters and importers, and the goods covered can be used as collateral for the deal.

At times of crisis, imports may be particularly critical to a country and exports can generate much-needed foreign exchange but banks also tend to reduce their exposure as a defensive measure, decreasing short-term trade lines.

WHAT WENT WRONG

Currently, as cash flow problems at exporters and importers become more severe, and they are less able to access cheap short-term finance to cover immediate needs, banks may be less willing to extend trade credit and reluctant to agree alternative forms of finance.

World trade is now shriveling. Japan's exports in February were half their level a year earlier. The World Trade Organization (WTO) forecasts trade will shrink 9 percent this year, and the Organization for Economic Cooperation and Development (OECD) sees a 13.2 percent fall.

Much of this decline is due to slumping demand in the recession, but the shortage of trade finance -- or the high cost where it is available -- is making things worse.

THE G20 PACKAGE

The G20 package does not involve $250 billion of new money. But because of the short-term nature of trade finance it can mobilize that amount of funding over two years with about $50 billion -- a significant amount.

The core of the package is a pool of money of which international institutions and national governments contribute 40 percent, and commercial banks the other 60 percent.

It is being jumpstarted with $5 billion from the International Finance Corp. (the World Bank's private-sector lender), China and Japan comprising the 40 percent public component. Add in the other 60 percent from private commercial banks and you get $12.5 billion.

The United States, Britain, the Netherlands, some other EU members, the African Development Bank and the Inter-American Development Bank are expected to contribute, taking the public share to $10 billion and the total pot to $25 billion.

China, the world's second biggest exporter, may also increase its contribution, especially if it gets a bigger share in the International Monetary Fund reflecting its growing role.

Trade finance instruments typically run for short periods. The package conservatively assumes that trade finance instruments will run for 180 days, so $25 billion will fund about $100 billion of trade over two years.

More than half of the $250 billion to be mobilized will come from similar funding by export credit agencies like the U.S. Export-Import Bank (Ex-Im Bank). The contribution of European agencies is still under discussion.

These institutions, often state-backed, usually insure export credits extended by banks. But as there is so little credit around right now, they will provide finance directly.

The package will also provide funding to buy up instruments in the secondary market for trade finance.

(Reporting by Jonathan Lynn; Editing by Elizabeth Piper)