Israel Doesn't See U.S. Limiting Loan Guarantees

Finance Minister Steinitz: U.S. won't change policy on guarantees, despite settlements dispute with Israel.

Israel does not expect the United States to limit use of loan guarantees despite a dispute with Washington over building in East Jerusalem and in West Bank settlements, Finance Minister Yuval Steinitz said on Thursday.

"I don't see any limitations on the horizon. It's not time to be concerned about that," Steinitz told reporters.

He added that Israel would prefer not to use them.

"I don't see any need to use them in the near future," Steinitz said. "But it's good they are there."

The finance minister noted that prior disputes over settlement building have led the U.S. to deduct rather than cancel the guarantees. In 2002, to help Israel deal with a recession caused by a global downturn and a wave of Palestinian suicide bombings, the U.S. provided a package of $9 billion in loan guarantees, where Israel could sell bonds internationally with the backing of the United States.

The guarantees have been instrumental in allowing Israel to raise money more cheaply and in sovereign ratings upgrades by credit rating agencies. Israel still has $3.8 billion left to use by 2011 after already issuing $4.1 billion in bonds backed by the U.S. and a $1.1 billion deduction for Israeli settlement building and concerns over the West Bank security fence.

Palestinians are looking to set up a state in the West Bank and East Jerusalem, land Israel captured in the 1967 Six Day War.

Last month, the U.S. re-approved Israel's loan guarantee program, subject to Israel meeting fiscal targets. It came despite the rift between Israel and its main ally over Israel's rejection of U.S. demands to halt settlement building.

The tensions have grown as Israel also plans to build a residential project in East Jerusalem.

In recent years, Israel has opted to issue bonds without U.S. backing. Its latest offering using its own creditworthiness was a sale of $1.5 billion in 10-year notes this past March at 262.5 basis points over U.S. Treasuries.

Steinitz said Israel's economy remained weak but was starting to stabilize.

He pointed to positive developments in recent weeks including the first rise in the Bank of Israel's economic performance index in 11 months in June, passing of the 2009 and 2010 state budgets, Standard & Poor's affirming Israel's credit ratings and stabilizing tax collections.

He also rejected demands from union leaders for a cost of living adjustment due to a spike in the annual inflation rate to 3.6 percent in June.

Steinitz mainly blamed government tax increases for the rise in the June consumer price index although he said it appeared that consumer demand was starting to improve.

"I don't think inflation is starting to rear its head," he said. "We need at least a half year to determine if inflation is starting to creep up."