Loan Guarantees

By Mitchell Bard

Since 1989, approximately one million Jews have immigrated to Israel. The majority, roughly 80 percent, have come from the former Soviet Union. Israel must provide these immigrants with food, shelter, employment and training. The task is even more challenging when it comes to absorbing Jews from relatively undeveloped countries like Ethiopia, who often must be taught everything from using a flush toilet to how to withdraw money from a bank. To meet these challenges, Israel has invested billions of dollars. In addition, the American Jewish community has contributed hundreds of millions of dollars through the United Jewish Appeal’s Operation Exodus campaign and other philanthropies.

Still, the task was so daunting, Israel turned to the United States for help. To put the challenge in perspective, consider that the United States — a country of 250 million people and a multi-trillion dollar GNP — admits roughly 125,000 refugees a year. In 1990 alone, nearly 200,000 Jews immigrated to Israel.

The United States led the Free World in helping secure the freedom of Soviet Jews. Over the past two decades, successive U.S. Presidents have raised the treatment of Jews with Soviet leaders, while members of Congress relentlessly kept the issue alive through legislation and the "adoption" of refusenik families.

Since 1972, Congress has appropriated funds to help resettle Soviet Jews in Israel. Since 1992, $80 million has been earmarked for this purpose. The program, which is administered by the United Israel Appeal, pays for the costs of flights and other travel expenses for the refugees. The program also funds absorption centers, elderly housing, youth villages, intensive Hebrew training and efforts to provide permanent housing and jobs to immigrants once they complete the journey to Israel.

The Need Grows

After the Soviet Union opened its gates, the trickle of immigrants became a flood — immigration from that country skyrocketed from fewer than 13,000 people in 1989 to more than 185,000 in 1990. Israel then asked for a different type of help. The United States responded in 1990 by approving $400 million in loan guarantees to help Israel house its newcomers.

Guarantees are not grants — not one penny of U.S. government funds is transferred to Israel. The U.S. simply cosigns loans for Israel that give bankers confidence to lend Israel money at more favorable terms: lower interest rates and longer repayment periods — as much as 30 years instead of only five to seven. These loan guarantees have no effect on domestic programs or guarantees. Moreover, they have no impact on U.S. taxpayers unless Israel were to default on its loans, something it has never done. In addition, much of the money Israel borrows is spent in the United States to purchase American goods.

When it became clear the flood of refugees was even greater than anticipated, and tens of thousands continued to arrive every month, Israel realized it needed more help and asked the United States for an additional $10 billion in guarantees.

A Success Story

In 1992, Congress authorized the President to provide guarantees of loans to Israel made as a result of Israel's extraordinary humanitarian effort to resettle and absorb immigrants. These guarantees were made available in annual increments of $2 billion over five years. While the cost to the U.S. government was zero, Israel paid the United States annual fees amounting to several hundred million dollars to cover administrative and other costs.

Under existing guidelines, no U.S. foreign assistance to Israel can be used beyond Israel's pre-1967 borders. Moreover, to underline dissatisfaction with Israel’s settlement policies, the President was authorized to reduce the annual loan guarantees by the amount equal to the estimated value of Israeli activities in the West Bank and Gaza Strip undertaken the previous year.

Thus, as the table indicates, the State Department determined that Israel spent just under $1.4 billion for settlement activity from 1993-1996. The President was authorized, however, to rescind deductions when making the funds available to Israel was in the security interests of the United States. President Clinton used this authority in the last three years of the program, so the actual reduction in the amount of guarantees available to Israel was $773.8 million.

The money related to settlements also had nothing to do with the new immigrants, none of whom were forced to live in the territories. In fact, only a tiny percentage chose to do so.

By all measures, the U.S. loan guarantee program was a huge success. Israel used the borrowed funds primarily to increase the amount of foreign currency available to the country’s business sector and to support infrastructure projects, such as roads, bridges, sewage and electrical plants. The guarantees also helped Israel to provide housing and jobs for virtually all of the new immigrants. Unemployment among immigrants, which peaked at 35 percent, has dropped to 6 percent, roughly the same rate as for the rest of the population.

Besides contributing to Israel's success in absorbing immigrants while maintaining economic growth, the loan guarantee program also sent a strong message to the private international capital markets about the confidence the U.S. has in Israel's ability to bear this potential economic burden. Consequently, Israel's credit rating was upgraded and Israel can borrow hundreds of millions of dollars in international financial markets on its own.

New Demands

In 2002, Israel requested new loan guarantees from the United States to help it cope with the devastating economic crisis caused by the Palestinian uprising and unrelenting terror attacks against its citizens, as well as to prepare for the anticpated defense and economic costs associated with the U.S. war with Iraq. In 2003, Congress approved $9 billion in loan guarantees over three years. As with the earlier guarantees, Israel was required to use the funds within the pre-1967 borders and the amount of the guarantees could be reduced by an amount equal to Israel's expenditures on settlements in the territories. The loan period was initially extended one year, but Israel used only half the guarantees, so a request was made and approved by the United States to extend the period until 2011.