The Loan Guarantee Confrontation

This is the one time it was really tried.

Everywhere else in this archive, the United States holds enormous financial leverage over Israel and declines to use it. In 1991 and 1992 a president picked it up, applied it in public, and forced a confrontation that ran for the better part of two years. The episode is worth documenting closely for that reason, and because the American government’s own auditors then explained, in writing, why it did not work.

What was at stake

The Soviet Union was collapsing and hundreds of thousands of Soviet Jews were emigrating to Israel. Prime Minister Yitzhak Shamir wanted a normal aid package of $3.2 billion for fiscal 1992 and, on top of it, $10 billion in American loan guarantees, drawn down at $2 billion a year, to finance housing and absorption.

A loan guarantee is not a grant. Washington hands over no money. It promises to cover the debt if Israel defaults, which lets a country with a weak credit rating borrow on international markets at rates it could not otherwise get. It costs the United States nothing unless something goes wrong, and it is worth a great deal to the borrower.

Israel’s advocates in Washington presented the request as humanitarian, which it partly was. The Bush administration saw something else: the only real point of purchase it had, at a moment when it wanted Israel at the Madrid peace conference and wanted settlement construction in the occupied territories to stop.

Baker says it out loud

In February 1992, Secretary of State James Baker told Israel publicly that unless it stopped building settlements in the occupied territories, it would not get the ten billion dollars.

Israel and its lobby went around the White House and took the request straight to Congress, where the support was there. Bush pushed back in public and asked Congress to delay the vote for 120 days.

That request is the whole lesson of the episode compressed into one procedural move. A sitting president, by asking for a delay, stopped assistance that the Israeli government considered essential, against the combined weight of that government and its Washington operation. The leverage was not theoretical. It worked.

It also cost him. The confrontation is widely understood to have damaged Bush with pro-Israel constituencies going into the 1992 election he lost, and no president since has attempted anything comparable.

How it ended

Neither side won it outright. The Israeli electorate resolved it.

Yitzhak Rabin replaced Shamir in 1992 and moved quickly to reverse his predecessor’s settlement drive, halting new construction and freezing work on about half the housing units Shamir had planned in the occupied territories. Israel’s finance minister credited those moves with unlocking the guarantees within a month of the new government taking office. Bush met Rabin at Kennebunkport that August and agreed to recommend congressional approval.

Rabin kept a distinction that mattered. He would freeze what he called political settlements, and continue building whatever he judged necessary for security.

Why the conditions did not hold

The most valuable document to come out of all this is a Government Accountability Office report examining whether the conditions attached to an earlier $400 million tranche were actually being honored.

Israel was expected to certify that the guaranteed money financed about 12,300 mortgages, worth $425 million, for immigrant housing inside its pre-1967 borders. It appears to have done so. The GAO’s point was that this did not matter:

Because money is fungible, financing the permitted housing with guaranteed loans freed an equivalent amount of Israel’s own budget to be spent wherever it chose, including in the occupied territories. The restriction could be satisfied to the letter while its purpose was entirely defeated.

The auditors found something else as well. Israel had agreed, as a term of the guarantee, to provide periodic data on its spending in the occupied territories and on settlement activity. It had provided none on the former and only incomplete information on the latter.

That is an official American finding, in a public report: the disclosure conditions were not being met, and the spending conditions were structurally unenforceable.

Why it matters

Three things are established here, and they are the reason this episode explains so much of the rest of the archive.

The leverage exists and it works. Bush proved it with a procedural request. Nothing about the relationship makes American conditionality impossible.

The conditions have to be built to survive contact with a national budget. Restricting where a specific pot of money is spent accomplishes very little when the recipient controls all the other pots, and the GAO said so at the time in language the government never disputed.

And the political price is real enough to deter successors. Israel got the ten billion. Settlement construction continued and expanded substantially in the decades after, under a formal American policy, maintained by both parties, that settlements obstruct peace.

The exception proves the rule in the original sense of the phrase: it tests it. American leverage was applied once, seriously, by a president willing to absorb the damage, and even then the conditions leaked and the policy did not change. Nobody has tried since.

Sources

• U.S. Government Accountability Office, “Israel: U.S. Loan Guaranties for Immigrant Absorption,” Report NSIAD-92-119, February 12, 1992 — the fungibility finding and the failure to provide required spending data
• Washington Post, “Baker Bars Israeli Loan Aid Unless Settlements Are Halted,” February 25, 1992
• UPI, “Israelis Pleased With Bush Reversal on Loan Guarantees,” August 11, 1992
• Bush and Rabin joint press conference announcing the loan guarantee agreement, August 11, 1992 (audio archive, Michigan State University Libraries)
• Washington Report on Middle East Affairs, “Israel’s US Lobby Loses First Round to Bush in Loan Guarantee Battle,” October 1991
• Contemporaneous reporting collected in the Detroit Jewish News digital archive, Bentley Historical Library, University of Michigan, September 1991 to September 1992