In January 2012, Deputy U.S. Secretary of State Thomas Nides and Deputy U.S. Treasury Secretary Neal Wolin announced that the United States would be extending by three years its $9 billion loan guarantees to Israel, first established in 2003. Today, the balance of loan guarantees Israel can take, before offsets, is $3.8 billion.
Struggling with increasing debt and a presidential race in which foreign aid has been called into question, many Americans are uneasy about their government ensuring that more money will be "given away" to Israel.
This fact sheet presents answers to the most frequently asked questions to help you fully understand what loan guarantees are, how they affect the U.S. economy and the average taxpayer and why they are so critical for Israel.
What are Loan Guarantees?
Loan guarantees are essentially the explicit agreements between two people - or two nations - that if one defaults on a loan the other is obligated to pay it back.
Whether between family members or between countries, loan guarantees mean the same thing. In this case, in 2003 the United States Federal Reserve, an obviously more reliable financial entity than Israel, promised to pay off Israeli loans worth up to $9 billion. The extension announced in 2012 means that United States commits itself to guaranteeing future Israeli loans worth up to the $3.8 billion remaining on the original agreement until 2015.
Israel is not the only country in the Middle East which has received loan guarantees from the United States. Turkey, Egypt and Jordan have also been given American loan guarantees, mostly in the aftermath of the Gulf War.
Do Loan Guarantees Adversely Affect the United States?
The most important thing to know about the loan guarantees is that they are not grants - not one penny of U.S. government funds are transferred to Israel and, ideally, the United States will never have to pay out even a single dollar.
The United States is accepting responsibility from international creditors for any loans the Israeli government takes out - with a few stipulations. Though this means that the U.S. could be hit with up to a $3.8 billion bill, plus interest, if Israel defaults on their loans, this is a mostly muted concern.
In 1992, Israel received $10 billion in loan guarantees from the American government to help the nation rebuild after its economy took a major hit following the Gulf War. Israel repaid every loan it withdrew and the United States was never called on to fulfill it guarantor obligations. Likewise, Israel has never defaulted against the loan guarantees put in place in 2003.
Loan guarantees for Israel also have no bearing whatsoever on U.S. domestic programs or taxpayers. 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. Unlike foreign aid, with loan guarantees taxpayer dollars will not be going to Israel outright.
Why Are Loan Guarantees So Important to Israel?
The Israeli economy is sound and by no means in dire straits like Greece or Libya, as just two examples, but loan guarantees enable the country to avert short-term crises while also getting the supplies and equipment they need to continue building their economy and financial sectors.
Having the United States Federal Reserve as a guarantor means that Israel can secure international loans at substantially lower interest rates than they would be able to alone. "Extending the loan guarantees strengthens the international position of the Israeli economy," said Israeli Deputy Foreign Minister Danny Ayalon in response to the American extension. "[The guarantees] will allow the government to continue to raise funds at lower costs."
Israel has not actually used the American guarantees since 2005, but having the assurance of their existence gives Israel a "safety net" for its economy. "We consider the loan guarantees as preparation for a rainy day," a senior official in the Foreign Ministry said. "This is a safety net for war, natural disaster and economic crisis, which allows Israel to maintain economic stability in unstable surroundings."
Additionally, the loan guarantees are an important signal to international credit agencies, who recently raised Israel's credit ratings, that the Israeli economy will not falter or disintegrate if they become involved in war or other financially draining activities.
Can the Guarantees Be Used For Anything?
Israel ideally uses the guarantees to offset the high costs of constantly fighting terror, preparing for future wars, building national infrastructure and buffering its high-tech community in case of another international meltdown.
When Congress approved the initial $9 billion in 2003, however, they included a stipulation the guarantees could not be used to get loans for money the government uses to build and enhance its presence over the "Green Line" in the West Bank. Moreover, the annual guarantees are reduced by the amount equal to the estimated value of Israeli activities in the disputed territories.
From 2003 to 2011, just under $1.1 billion was subtracted from the overall $9 billion guarantees as that is what Israel was estimated to have spent on infrastructure in the West Bank.
U.S. Treasury Secretary Timothy Geithner and Israeli Treasury director-general Doron Cohen signed an agreement in October 2012 that will extend U.S. loan guarantees to Israel to 2016. The agreement, gives Israel four more years to use $3.8 billion in guarantees left over from the $9b. in guarantees granted in 2003.
Assisting Israel, America's closest ally in the Middle East and the region's only democracy, promotes peace. A strong, secure economically healthy Israel can and will make peace with any willing neighbors.
Two decades ago the United States provided Israel $10 billion in loan guarantees and Israel met all of 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.
Over the past decade, the United States has again promised Israel its support in building its economy. Loan guarantees are just one of the ways this is accomplished with the least amount of negative repercussions to the American taxpayer.