Officials say State Dept. report on spending beyond Green Line not linked to US-Israel tensions

Loan guarantees serve both as an emergency stop-gap for a crisis and a means of lowering Israel's borrowing costs.

March 25, 2015 16:43
2 minute read.
US President Barack Obama and Prime Minister Benjamin Netanyahu.

US President Barack Obama and Prime Minister Benjamin Netanyahu. . (photo credit: REUTERS)

Government officials on Wednesday downplayed reports that the State Department is preparing a document to submit to Congress that would subtract money Israel spent on construction beyond the Green Line from US loan guarantees.

The officials said that this is standard procedure and not linked – as some have suggested – to the upsurge in tension between the Obama administration and Jerusalem since the election last week of Prime Minister Benjamin Netanyahu.

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Israel has some $3.8 billion in loan guarantees left for it to use through 2016.

Loan guarantees serve both as an emergency stop-gap for a crisis and a means of lowering Israel’s borrowing costs. When the government goes to borrow money, it can pay substantially cheaper interest rates if it has a US guarantee, which promises the lender that Uncle Sam will pick up the bill for the loan if for some reason Israel can’t pay it back.

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

Then prime minister Yitzhak Shamir had to promise not to use guarantees for settlement activity when then president George H. W. Bush and secretary of state James Baker threatened to cut off $10b. worth of guarantees. At that point, Israel was dealing with a massive influx of Soviet immigrants, and had generally worse credit.

In the 1990s, Israel applied the guarantees to borrow annually, but this 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, then president George W. Bush considered reducing the loan guarantees for costs associated with building the security barrier.

Since 2004, however, Israel hasn’t touched the $3.8b. 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 Poor’s.

Furthermore, he notes, 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 amount of scale back is also unclear. A 2013 report by Peace Now estimated that the government set aside NIS 1b.

exclusively for settlements. That represents less than 7 percent of the remaining loan guarantees available to Israel.

Herb Keinon contributed to this report.

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