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Fact Sheets#15: Loan Guarantees(January 29, 2003)Israel is seeking up to $8 billion in loan guarantees from the United States to compensate for the Jewish state's short-term economic crisis caused by the global recession, the collapse of its high-tech industry, and the cost of fighting terror. The Israeli economy has been devastated by more than two years of warfare initiated by the Palestinians after their rejection of Israel's offer to create an independent Palestinian state in more than 95% of the West Bank. Israel lost 2% of its Gross Domestic Product in the last two years; on a per capita basis, the decline was 3% per year. Unemployment has soared above 10% as 50,000 businesses closed in 2002. The tourist industry alone is losing about $2 billion per year. Now, in addition to the costs imposed by Palestinian terror, which raised defense spending by about $500 million a year, Israel must now incur additional expenses to prepare for a possible attack from Iraq. Israel had to make severe cutbacks in its domestic budget, at great political cost, to help pay for additional security needs, and to stave off a budget crisis. Israel is not in the dire straits of countries such as Argentina, its basic economy is sound, but guarantees are needed to help the nation get past the short-term crisis. Guarantees are not grants — not one penny of U.S. government funds would be transferred to Israel. The U.S. will simply be cosigning loans for Israel that will allow it to obtain financing from private banks. With these guarantees Israel can secure loans for longer terms at lower interest rates. During the 1991 Gulf War, in addition to the direct costs of military preparedness and damage to property, the Israeli economy was also hurt by the inability of many Israelis to work under the emergency conditions. The economy functioned at a fraction of normal capacity during the war, resulting in a net loss to the country of $3.2 billion. The prospect of a new war with Iraq, whose leader has threatened to again attack Israel, will put added strain on Israel's already weakened economy. Guaranteeing loans for Israel is the most cost-effective way for the United States to help Israel rebuild its shattered economy and protect it from further damage if we go to war with Iraq. Loan guarantees for Israel have no bearing whatsoever on U.S. domestic programs or guarantees. Helping Israel will not take any money away from the billions of dollars in guarantees and loans devoted to meeting America's immediate needs at home. Assisting America's closest ally in the Middle East, and the region's only democracy, also promotes peace. A strong, secure economically healthy Israel can and will make peace with willing neighbors. The money Israel obtains through the guarantees will not be used to build settlements. When Israel received guarantees in 1992, the money could not be used beyond Israel's pre-1967 borders, and Israel was penalized for money spent in the territories. Linking loan guarantees to political issues reinforces the Arab view that Israel can be forced to capitulate to their demands if the U.S. uses its economic leverage against Israel. This reduces the possibility that the Arabs will make concessions at the peace table. The Israeli government under Prime Minister Sharon has agreed, in principal, to make compromises regarding settlements; however, Israel should not be forced to take unilateral steps, and compromise will only be possible when Palestinian terror ceases. Israel is not seeking help only from the U.S. government. Its economic crisis has required emergency charity campaigns to be initiated in Jewish communities around the world. In the United States alone, American Jews have contributed hundreds of millions of dollars to help Israel through this difficult period. A decade ago the United States provided Israel $10 billion in loan guarantees and Israel met all its obligations. Those guarantees helped Israel absorb hundreds of thousands of immigrants from Ethiopia and the former Soviet Union and to bolster Israel's economy at a critical time that helped the Nation's leaders feel secure enough to initiate the Oslo peace process. The guarantees can also benefit the U.S. economy if Israel uses portions of the funds to purchase goods from the United States. They are also an investment in Israel's future. The only cost to the U.S. taxpayer would occur if Israel were to default on its loans, which it has never done. A small percentage of each loan guarantee must be set aside in a "reserve fund" in case a country defaults on its loan payments. Last time Israel paid these costs, and officials have indicated they would do the same again. |
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