The Israeli government has said it would not be swayed by Washington's warning that it would trim a $9bn (E8bn, £5.7bn) loan guarantee package if money raised was spent for the benefit of Israeli settlement in the occupied West Bank and Gaza Strip.
"It is not an issue that will affect government policy," Jonathan Peled, foreign ministry spokesman, said yesterday.
Israel this week raised $1.6bn in a bond issue in the US, backed by the first tranche of the loan guarantee package that the two sides signed last month.
Subsequent tranches may, however, be affected by a condition of the agreement that allows the US administration to deduct every dollar the Israeli government spends outside its pre-1967 borders.
Washington has yet to say whether the condition would apply also to the costs of the defensive barrier that Israel is building inside the West Bank.
Mr Peled said Israel would not be deterred from completing the barrier, which President George W. Bush has described as a "problem", but added: "We want to reach an understanding with the US." That was why Ariel Sharon, prime minister, had deferred a decision on the barrier's final route, he said. . . .
Analysts said the loan guarantee package offered Israel considerable benefits but was not vital to its economic survival. Israel has never defaulted and could raise funds without US backing, but the loan guarantees allow it to borrow more cheaply.
Some economists think this has a downside. "It makes it easier to raise money and that creates bad habits," said Yaacov Fisher, managing director of I-Biz, an Israeli consultant. "Without the guarantees we would have to behave much better."
As for the US threat to trim the package, Mr Fisher said: "$9bn is a lot of money. What are we talking about? Maybe half a billion."
Richard Fox of Fitch, the international rating agency, said Israel would use the guarantees to refinance debt that was backed by a previous $10bn US package and is now falling due. He said $1.4bn was due for repayment this year.
He said the question of how Israel would cope if there were to be a substantial reduction of the package was hypothetical. "I don't think it will happen."
The previous package, which ran from 1993 to 1997, was granted after the US threatened to withhold loan guarantees unless Israel halted settlement activity.
In the end, the US withheld some 13 per cent of the $10bn package to offset spending on settlements. However, after funding was reinstated to cover security expenditure, the net loss to Israel was only $774m.
Diplomats said the issue of withholding aid was complicated by the problems of identifying spending linked specifically to the West Bank and Gaza. "It gets hidden in the budgets of all sorts of ministries," said a western diplomat.
A study published in January estimated that half of US aid to Israel was spent on settlements in 2001, although settlers make up only 3 per cent of the Israeli population.
The study, commissioned by the Peace Now organisation from Dror Zaban, a former senior Israeli finance ministry official, did not include the cost of defending the settlements.
Mr Zaban, who is preparing a new report, said yesterday: "I believe it will show the settlers are still a preferred sector within the Israeli economy."
***** New York Times September 17, 2003 U.S. Cutting Loan Guarantees to Oppose Israeli Settlements By RICHARD W. STEVENSON
WASHINGTON, Sept. 16 - The Bush administration announced today that it would reduce loan guarantees to Israel to meet Congressional restrictions on providing financial support to Israel's continued expansion of settlements in the West Bank and Gaza. The administration said it might further restrict the guarantees to protest Israel's construction of a barrier dividing what it considers its land from Palestinian territory.
The action was almost totally symbolic. It came on the same day that Israel sold $1.6 billion of bonds on Wall Street, all backed by a guarantee of repayment by the United States government under legislation passed last spring that provides Israel with up to $3 billion in loan guarantees annually for three years.
It is the first such move the administration has taken against Israel.
As a practical matter, the decision will reduce by an as-yet-undetermined amount the level of loan guarantees available to Israel in the year starting Oct. 1, and it is unclear whether Israel will even seek to use the full amount of the guarantees available to it.
But the move still amounts to a rare if widely anticipated slap at Israeli policy by the United States at a time when the administration is struggling to keep its peace proposal for the region alive. . . .
Even as the administration imposed the financial penalty on Israel, though, the United States was vetoing a United Nations Security Council resolution demanding that Israel end threats to exile Yasir Arafat, the Palestinian leader. While repeating that the United States opposes any move by Israel to send Mr. Arafat into exile or kill him, Condoleezza Rice, the national security adviser, said in an interview that the international community would have to confront the question of how to deal with Mr. Arafat, who she said "stands as an obstacle to peace." . . .
Legislation passed by Congress in March authorized loan guarantees to Israel of up to $9 billion over three years. But the law said the amount available each year should be reduced by an amount equal to what Israel spends on activities the president decides are inconsistent with American policy, wording intended to refer to the settlements but potentially broad enough to encompass the barrier.
Mr. Bush this week delegated to Secretary of State Colin L. Powell the responsibility for deciding the issue, and today a State Department spokesman, Adam Ereli, said "a reduction will be made in accordance with this legislation."
"The precise amount is still being determined, but will be an estimate based on a range of Israeli government expenses associated with the settlement activity," Mr. Ereli said.
The administration said it was now considering whether to apply the same principle to Israel's construction of the barrier, which the United States has said could amount to Israel taking possession of disputed land before a peace deal can be worked out.
"In terms of the fence, there are still discussions ongoing," said Scott McClellan, the White House spokesman. "We have made our concerns known. I don't rule anything out at this point."
It is not clear how much money may be at stake. The loan guarantees help Israel raise money to cover its budget deficit at lower interest rates than it would pay otherwise, but they do not cost American taxpayers anything unless Israel defaults on the bonds.
Israel has $1.4 billion in unused guarantees left for this fiscal year, which ends Sept. 30, and it can roll them over to next year, adding them to the $3 billion that will become available then. But the total amount available will now be reduced by the amount the United States estimates that Israel has spent on the settlements, and possibly on the barrier as well, since March.
<http://www.nytimes.com/2003/09/17/international/middleeast/17LOAN.html> *****
-- Yoshie
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