Why the US Loan Guarantee threat won't affect Israel's economy

US state department is considering reducing loan guarantees to Israel as a sign of the growing political discord between the two allies.

By
March 25, 2015 16:28
2 minute read.
money

Shekel money bills. (photo credit: REUTERS)

 
X

Dear Reader,
As you can imagine, more people are reading The Jerusalem Post than ever before. Nevertheless, traditional business models are no longer sustainable and high-quality publications, like ours, are being forced to look for new ways to keep going. Unlike many other news organizations, we have not put up a paywall. We want to keep our journalism open and accessible and be able to keep providing you with news and analyses from the frontlines of Israel, the Middle East and the Jewish World.

As one of our loyal readers, we ask you to be our partner.

For $5 a month you will receive access to the following:

  • A user uxperience almost completely free of ads
  • Access to our Premium Section and our monthly magazine to learn Hebrew, Ivrit
  • Content from the award-winning Jerusalem Repor
  • A brand new ePaper featuring the daily newspaper as it appears in print in Israel

Help us grow and continue telling Israel’s story to the world.

Thank you,

Ronit Hasin-Hochman, CEO, Jerusalem Post Group
Yaakov Katz, Editor-in-Chief

UPGRADE YOUR JPOST EXPERIENCE FOR 5$ PER MONTH Show me later Don't show it again

Reports have surfaced in recent days that the US state department is considering reducing loan guarantees to Israel by the amount that Israel spends on settlements.

Though clearly a sign of sharpening political discord, following through on the threat would likely have negligible impact on Israel's economy.

Be the first to know - Join our Facebook page.


To understand the implication, let's begin by clarifying what a loan guarantee is not. It is not related to the $3 billion in military aid the US gives Israel each year, which is anyway controlled by Congress. It will not cut funding for Iron Dome or missile defense or the F-35 fighter jet. It is not related to the US-Israel's 30-year-old free trade agreement or the slew of preferential incentives that helped push bilateral trade to roughly $40 billion in recent years.

So what is a loan guarantee?

When the Israeli government goes to borrow money, it can pay substantially cheaper interest rates if Uncle Sam promises to pick up the bill for the loan if for some reason Israel can't pay it back. It's the international version of getting parents to sign on as guarantors for an apartment. Loan guarantees serve both as an emergency stop-gap for a crisis and as a means of lowering borrowing costs.

At one point, the threat of losing loan guarantees was a serious one.

Prime Minister Yitzhak Shamir had to promise not to use guarantees for settlement activity when President George H. W. Bush and Secretary of State James Baker threatened to cut off $10 billion worth of guarantees in 1991. At that point, Israel was dealing with a massive influx of Soviet immigrants, and had generally worse credit.



Throughout the 1990s, Israel applied the US's guarantees annually, but it stopped after 1998 until the second intifada, which had a dramatic negative impact on Israel's economy. In 2003, at the height of the uprising, President George W. Bush considered reducing the loan guarantees for costs associated with building the security barrier, to which his administration objected.

Since 2004, however, Israel hasn't touched the $3.8 billion in guarantees it still has available.

"Since 25 years ago, Israel's credit has improved dramatically. The government's books are better, it borrows less, and it borrows more locally, so there is overall less reliance on the loan guarantees," said Dr. Elliot Hentov, Director of Sovereign Ratings & International Public Finance at Standard and Poors.

Furthermore, he noted, borrowing costs for Israel are at historically cheap levels at the moment because of near-zero interest rates and loose monetary policy in the advanced economies.

"Right now, it just has symbolic value. It would matter materially in a crisis scenario," said Hentov, adding that a crisis would have to be "spectacular." Since 2004, Israel has weathered four wars and the global financial crisis without turning to the guarantees.

The amount Israel invests in settlements is also debatable, so the scale of the cut guarantees is unclear. A 2013 report by Peace Now estimated that the government set aside NIS 1 billion exclusively for settlements, about $250 million.

That figure represents less than 7% of the remaining US loan guarantees available to Israel.

Related Content

The Teva Pharmaceutical Industries
April 30, 2015
Teva doubles down on Mylan, despite rejection

By GLOBES, NIV ELIS