Washington to Extend $3.8b in Loan Guarantees to Israel

Move calms Jerusalem's fear money would be nixed.

The Obama administration plans to recommend that Congress extend American loan guarantees to Israel for another three years, until September 2015, administration officials informed Israel this week.

The news came as a relief to Jerusalem, which had been worried that Washington would refuse to extend the $3.8 billion worth of guarantees.

Deputy Secretary of State Thomas Nides and Deputy Secretary of the Treasury Neal Wolin announced the administration's decision at a meeting with Deputy Foreign Minister Danny Ayalon on Monday. According to one senior American official, the request is expected to enjoy broad bipartisan support in Congress and win quick aproval.

"The U.S. is a true friend and ally of Israel's," Ayalon said yesterday. "The partnership between our countries is a natural one. Extending the guarantees will strengthen the international standing of Israel's economy and enable the government to continue raising money [on international markets] at low cost."

A senior Foreign Ministry official said that Israel submitted an official request to extend the guarantees in September. But the request was not included in the budget that Congress approved in December, and the deadline for extending the guarantees is September 30, 2012. That raised fears in Jerusalem that the administration did not intend to approve the extension.

The Foreign Ministry also feared that even if the request was eventually forwarded to Congress, the need to pass separate legislation, instead of just including it in the annual budget, might create both technical and political difficulties that would result in it not being approved.

Foreign Ministry officials had therefore been prepared for a tough conversation with their American guests on Monday. Instead, the visitors surprised them by immediately making it clear that the administration supports extending the guarantees and plans to recommend that Congress do so.

The initial agreement on the guarantees was signed in 2003, when Israel was in the midst of a deep recession brought on by the second intifada, then at its height, and needed U.S. guarantees to be able to raise money on overseas markets at affordable interest rates. That agreement covered $9 billion worth of loans, but Israel hasn't actually used it to raise money since 2004.

The agreement also stipulated that any Israeli government expenditures on settlements would be deducted from the guarantees. Between the deductions and the amount Israel has already raised, it has $3.8 billion worth of guarantees left.

A senior Foreign Ministry official explained that even though Israel has been able to raise money at reasonable interest without the guarantees since 2005, the guarantees help to boost the country's credit rating, since the rating agencies see them as a safety net.

"We see the guarantees as preparation for a rainy day," he said. "It's a safety net for a war, natural disaster or economic crisis that will enable Israel to maintain economic stability in an unstable environment."