The US loan guarantees

Israel first requested loan guarantees from United States in September 1991 in the midst of wide-scale immigration to Jewish state.

Netanyahu addresses Congress 311 (photo credit: Avi Ohayun/GPO)
Netanyahu addresses Congress 311
(photo credit: Avi Ohayun/GPO)
Standard & Poor’s decision on Friday to cut the long term US credit rating may spur Washington to stop its loan guarantee program to Israel.
In March, the Office of the Inspector General, which examines US foreign missions and embassies abroad, argued that Israel’s “loan guarantee program can prudently be terminated in accordance with the sunset clause in the original legislation, which provided that it would end by 2011.”
The recommendation to end this important piece of US economic assistance should raise eyebrows and questions about the effects it might have on the Israeli economy.
Israel first requested loan guarantees from the United States in September 1991, soon after the Gulf War and in the midst of wide-scale immigration to the Jewish state.
The initial program foresaw Israel borrowing $10 billion from various commercial banks in the US and the US government acting as a sort of co-signer, guaranteeing repayment of the loans in case Israel could not meet its obligations.
Because the US acted as a guarantor, the loans were received at the very best possible rates.
The program envisioned Israel drawing down the loans at $2b. a year for five years. According to the Congressional Research Service, the settling of immigrants never exhausted the original loan amounts and Israel was continually left with a surplus of money that it had to direct to other projects.
In 2003, Congress and president George W. Bush approved a second round of loan guarantees, totaling $9b., to help Israel deal with the economic crises and the second intifada. By 2010, Israel had only borrowed 25 percent of the money made available to it under this second program.
The financial liquidity provided by the program is completely separate from other forms of financial aid, especially the considerably larger amounts of military aid that Israel continues to enjoy from its American ally.
The loan guarantee program is seen by US Jewish organizations and American diplomats alike as a highly successful and efficient way to aid Israel at no cost to US taxpayers.
The Jewish Community Relations Council argues that by all measures, the program has been a huge success.
Israel uses the borrowed funds primarily to increase the amount of foreign currency available to its business sector and to support infrastructure projects.
A 2005 report by the Office of the Inspector General noted that the 2003 agreement stabilized Israel’s economy, and the conditions attached to it provide for reforms that will strengthen the economy and US-Israeli relations.
The change in the State Department’s stance on loan guarantees may, as the 2011 report argues, merely be related to their view that Israel has joined the OECD and “is now a modern, self-sufficient economy capable of supporting its citizens as an industrialized country.”
However, the change in attitude may also be related to a January 2010 interview with PBS in which special envoy George Mitchell claimed America might use the loan guarantees as leverage to end Israeli housing construction in the West Bank.
Israel’s economy continues to grow and unemployment is low. With a GDP of $219 billion and a growth rate of around 5% a year, Israel continually outshines many of its peers.
However, Israel’s debt load is slightly more worrying; at 77% of GDP, it ranks 22nd in the world, which means a higher than average debt load. Given the huge protests over housing and social welfare that have erupted in recent weeks, it is clear that the numbers paint only a partial picture. There are serious concerns among large sectors of the Israeli public about their financial future.
For these reasons, the government should take seriously the recommendations to end the loan guarantee program.
If the intention to end the program represents a policy shift by the State Department and pressure against Israel to end construction in the West Bank, this should be viewed as an important development.
Furthermore, the responsible financial authorities should examine why the loan program was never used to its full potential in the past decade; if the desire was to illustrate the Israel does not need the money, then it seems that task has been accomplished.