Loan Guarantee Bid By Israel Threatens US Mideast Scenario

WITH success in convening a Middle East peace conference seemingly within its reach, the Bush administration is looking for a way around the latest controversy that threatens the meeting it has labored long and hard to broker: Israel's request for $10 billion in loan guarantees.On Friday, the administration announced plans to delay consideration of the Israeli request, sought to help the Jewish state absorb a massive wave of immigrants from the Soviet Union. The White House sought the delay after Israel refused to postpone its request. United States officials are worried that underwriting new loans now might prompt Arab states to boycott the talks, which are tentatively scheduled to begin next month. But, insisting that there is no link between loan guarantees and peace talks, pro-Israeli lobbyists have mounted a major campaign to secure immediate approval. As Congress reconvenes this week, a showdown appears imminent. "What we don't want to have happen is to lose what might be the best opportunity we've had for peace in a long, long time," Secretary of State James Baker III told a news conference Friday.

Lawmakers agree to four-month delay Several leading lawmakers have publicly agreed to the administration's request for a four-month delay. The pivotal figure in the debate will be Senate majority leader George Mitchell (D) of Maine, who has deferred a decision pending consultation with other Senate Democrats. With US guarantees, Israel would be able to borrow money from commercial banks at lower interest and with longer amortization. The Bush administration is sympathetic in principle to the guarantees but worried about the timing of the Israeli request. Many Arab states, which are already lukewarm about the proposed peace conference, are convinced that Israel will use the money to build settlements in and tighten its grip on the occupied West Bank and Gaza Strip at the same time that the fate of the territories is supposed to be decided by negotiations. Mr. Baker would also like to use to loan guarantees as leverage to persuade Israel to halt construction of settlements in the territories, which the administration says is the main obstacle to a peace settlement. "Baker's a deal maker, and he likes to have as many cards in his hand as possible," says one administration source. Pro-Israeli lobbyists say the US has a moral obligation to help Israel gather in the last remaining Jews seeking to emigrate to the Jewish homeland. Unlike an actual loan, they point out, a loan guarantee requires no expenditure of US funds.

Concern expressed about new debt Critics of the plan worry that if Israel assumes as much as $20 billion in new debt here and abroad to pay absorption costs - more than doubling its current net debt - it may not be able to keep up with payments, leaving the US to pick up the tab. Under new US budget rules, if the loan guarantee is not approved by Sept. 30, the last day of the current fiscal year, lawmakers will have to set aside a percentage of the $10 billion against a possible default. The exact amount, expected to be around 10 percent, or $1 billion, would depend partly on estimates of Israel's ability to repay. The need to set aside money in the budget is not likely to diminish support for the loan guarantee which, even among advocates of the 120-day delay, runs extremely high in Congress. But it will force lawmakers to explain to their constituents why several hundred million dollars that is not available to extend unemployment benefits at home and finance other domestic programs is being set aside to underwrite the creation of jobs and the building of houses in Israel.