George Bush’s offer of $10 billion in loan guarantees to help Israel resettle Soviet and Ethiopian refugees may or may not have been a brilliant move for American diplomacy and domestic politics. It rewarded Prime Minister Rabin for partially halting settlement construction in the occupied territories and for showing greater flexibility in negotiations. Will it also feed a negative Arab reaction? While designed to ease Bush’s problem with Israel’s American supporters, did the promise, in fact, help the former President in the election?

Leaving political considerations aside for the moment, what are the implications of the guarantees for chronically deficit American budgets? The press initially gave us only sketchy or contradictory information because there was no official clarity on how the guarantees would be structured. When the measure passed the House, it was treated with equal obscurity—buried in longer articles and lacking details. For guidance I called the State Department and my congressman. He had voted for it, but his staff knew few of the bill’s provisions. Here’s how I understand what happened.

First, the Congress did not approve $10 billion in guarantees in one lump transfer, but rather $2 billion a year over five years. Are guarantees cost-free as the press suggested? No. Apart from the obligation the United States would incur if Israel defaults, there is a legal requirement that all United States international loan guarantees be “scored” with a certain percentage that is set aside and deposited in a common pool to cover default by any future government (not just Israel) receiving a guarantee.

The percentage that is scored is normally set by an interagency committee chaired by the Office of Management and Budget and could be as low as 2 or as high as 12 percent of the total loan amount. Penny-pinching OMB Director Richard Darman sought a “score” of 8 to 9 percent. His more politically sensitive superiors in the White House settled for 4.5 percent or $90 million from the United States budget each year that $2 billion is disbursed. Israel, of course, is also sensitive (to American anti-foreign aid sentiment) and offered to pay the $90 million from its funds each year. Those dollars actually come in fungible fashion from the over $3 billion in American assistance that is annually appropriated for Israel.


A United States government guarantee means Israel can borrow from private lenders at the lowest possible interest rate, i.e., the rate the United States itself would be charged. That is a crucial point because if Israel had to borrow on its own account, the interest rate would be considerably higher. Israel’s credit standing in the view of most financial institutions is middle grade (B or C) at best—even lower if political risk is factored into the evaluation.

With such an unattractive credit rating, is there a danger of default? And what will happen if Israel is later unable to repay the loans we guarantee? There arc two possibilities. Ideally, the creditors (bond holders or banks) may agree to reschedule payments, canceling or stretching out the original loan terms. That is what has happened in some Latin American and Eastern European countries with private debt not guaranteed by the United States. In the Israeli case, however, the creditors will more likely send the bill to the guarantor, meaning the United States will be obliged to pay.

That may happen even without technical default. Under present law Israel does not face creditors alone. The Cranston Resolution stipulates that American economic aid for Israel in any year will be no less than the amount of loan principal and interest that it must repay to the United States that year. In effect, the United States is currently repaying Israel’s past indebtedness with new aid dollars. While it is not certain that the new guaranteed loans will also be under this requirement, it is possible that the United States will follow past practice and oblige itself to increase aid to Israel in order to cover their “repayment.”

Some have argued that the American economy will benefit from purchases here that Israel makes with the guaranteed loan money. That certainly should be the case; it is a basic principle of foreign aid that money sent abroad should be spent here if at all feasible. Aid to Israel is not, however, administered in the same way as assistance to other countries.

Therein may lie the answer. Treating Israel like every other AID (Agency for International Development)-recipient nation might be the easiest way to assure that the guaranteed loan money is, in fact, spent as we desire, in the United States when possible and never in the occupied territories. Rather than, as now, writing an annual cheek and handing it over to the Israeli government with little or no accountability, we could establish a formal AID Mission in Israel and deliver and monitor funds as project aid. That procedure is well established in all other AID-recipient countries, but there is currently no AID Mission in Israel.

If there were, a hundred or so AID officers and several times that many private American contractors would help write project proposals and inspect plans before disbursing funds. Housing projects, vocational education schemes, and infrastructure work would all be carefully controlled. Nonproject money for balance-of-payments relief would be subject to Jerusalem’s agreeing to specific economic reform measures, such as ending uneconomic subsidies and selling government-owned enterprises. In other words, we would Egyptianize the Israeli AID program. (Rather than cope with AID’s regulations and bureaucracy, Israel might well decide it preferred to abandon the idea of building any more settlements.)

Aid to Israel, like aid to Egypt and other traditional major recipients, is costly in its budgetary impact on the United States. Our self-imposed obligation to keep filling the coffers of these “entitlement” countries means we have less with which to assist new democracies or strife-torn nations in Eastern Europe or Africa—or needy communities here. It also means the regular recipients have a reduced incentive to reform their statist, heavily subsidized economies.

The fundamental point is that aid, in whatever amount or form, is only a short-term answer to Israel’s severe problems of maintaining economic viability and absorbing refugees from abroad. The sensible answer for Israel’s present plight is to forge a new course: reduce political risk (and defense outlays) and generate massive private investment by trying harder to fit into the neighborhood. In time, regional integration can bring trade and cooperation. It’s the route the rest of the world is taking— even South Africa, Iran, and the former Soviet Union.

The essential precondition, of course, is peace. Making peace, even on less than ideal terms, must be at the top of the Israeli agenda. The decisions that Congress and the new Clinton administration make should also be designed to push peace as a priority—ahead of domestic politics. American economic interests demand no less.