US says no plan to cut Israel loan guarantees, but it's been tried before

US Mideast Envoy George Mitchell hinted over the weekend that the US could withhold loan guarantees from Israel to pressure the Jewish state back to peace talks with Palestinians. Aid has been used to try to change Israel's behavior in the past, with mixed results.

Ronen Zvulun/Reuters
Palestinian labourers work at a construction site in a settlement near Jerusalem known to Israelis as Har Homa and to Palestinians as Jabal Abu Ghneim, December 29.

US Middle East envoy George Mitchell touched off a minor furor in the US and Israel over the weekend, after he told PBS interviewer Charlie Rose that "under American law, the United States can withhold support on loan guarantees to Israel" when asked what tools the US had to prod the country back to peace talks.

"It's one thing to say that's a tool in the toolbox, and another to say it's one we are getting ready to use. We are not," the Times of London quoted State Department spokesman Philip Crowley as saying. The loan guarantees, which ensure that the US will pay Israel's loans in the event it cannot, enable Israel to secure loans at favorable rates.

Israel Finance Minister Yuval Steinitz responded by saying his country doesn't really need the money and the US quickly moved to say that a suspension of the loan guarantees wasn't something currently being considered.

But while Israel says the current US loan guarantee program isn't necessary for its own prosperity, US financial largesse has been crucial to helping establish the country as one of the wealthiest and economically vibrant nation's in the Middle East. "The United States has given Israel, apart from political and military support, munificent and magnificent assistance in th economic sphere,'' former Prime Minister Benjamin Netanyahu told a joint session of Congress in 1996.

Could delaying or halting some aid to Israel be effective in prompting Israel to go back to the negotiating table? Past efforts are mixed, with the most recent aid-based prodding generally deemed to have been a failure but with greater successes in the more distant past.

Jordan River canal dispute

In 1953, Israel began a canal project on the Jordan River that Syria and other Arab neighbors worried would divert significant amounts of water for Israeli use. After Israel ignored US and United Nation's demands that year that it halt work on the canal, then-US Secretary of State John Foster Dulles said in September 1953 that the US was suspending foreign assistance to Israel. Work on the canal stopped that October, and US aid flows soon resumed.

Suez Crisis disagreement

In 1956, Israel attacked Egypt with French and British backing in a dispute over control of the Suez Canal. Israel quickly won a crushing military victory and seized control of the Sinai Peninsula from Egypt. After the end of hostilities, Israel stated its intent to hold on to the territory it had acquired in the war, including Sinai. Dwight Eisenhower, president at the time, threatened to cut off US government aid to Israel and to take legislative action to block private aid by US citizens to the Jewish state if Israel did not return the peninsula to Egypt. Israel withdraw from the Sinai and other conquered territories in the Spring of 1957 in exchange for US border security guarantees. Aid in this instance was never cut off.

President Bush and loan guarantees

In late 1990, Israel requested $10 billion in loan guarantees from the US, mostly to finance the resettlement of Soviet Jews in the country. In 1991, then President George H. W. Bush asked Congress to delay action on the loan guarantee as he sought to arrange an Arab-Israeli peace conference. In early 1992, then-Secretary of State James Baker said the president would not approve the loan guarantees unless Israel promised to halt settlement expansion. Then Israeli Prime Minister Yitzhak Rabin announced a settlement freeze in July of 1992 and the guarantee program was approved that October.

While this would appear to be a success for financial diplomacy, settlement expansion was never truly "frozen." Settlements expanded in 1992 and in each intervening year until 1996, when that particular guarantee program ended.

Military aid delay

The US has from time to time suspended parts of its military aid program to Israel in response to Israel's use of the weapons. For instance, former President Ronald Reagan ordered a halt to the delivery of cluster bombs to Israel in 1982 after Israel was found to have illegally used the weapons in its invasion of Lebanon. The exports were restored in 1988.

History of US aid to Israel

Loan guarantees are a promise to make payment if the responsible party, in this case Israel, defaults. The US has never had to pay out on a loan guaranteed for Israel, but sets aside money for that eventuality. The Congressional Research Service says such guarantees typically cost the US about 4 percent of the value of the loans, so the cost for a $10 billion guarantee program is about $400 million

The US Agency for International Development puts US military and economic aid to Israel since its founding at over $154 billion, most of that since the start of the Kennedy administration. Congress also exempts Israel from the usual requirement that all its military aid be spent on US hardware. The exemption, which allows Israel to spend about 25 percent of US military aid within its own defense industry, has helped make Israel one of the largest arms exporters in the world.

What it means for the peace process

The Obama administration's current goals for restarting the stalled peace process involve simply getting both sides back to the table. Mr. Obama, who had previously insisted on a settlement freeze in the occupied West Bank and East Jerusalem as an Israeli gesture of good faith, now appears satisfied with an Israeli slowdown that it has described as a 10-month freeze. Palestinian Authority President Mahmoud Abbas has continued to insist that a full construction freeze is a precondition for resuming talks.

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