Loan Decision Muddies Peace Talks

ON hold and out of sight for the past four months, the controversial issue of whether the United States should underwrite a multibillion-dollar loan to Israel has come back to haunt the Bush administration and Congress.

When the issue first surfaced last September, it led to an acrimonious confrontation between the administration and supporters of Israel. A decision was deferred for 120 days, but not before damaging already strained relations between Washington and Jerusalem.

As the new day of decision draws near, there is growing concern that no matter how the issue is handled it could jeopardize the Middle East peace process, now in its fragile early stages.

"The administration is in a bind because it was planning to see movement in the peace process by now and to be able to make up its mind on that basis," says a pro-Israel lobbyist in Washington.

The main risk is that if the $10 billion loan guarantee is granted, Arab negotiators will boycott the talks. If the guarantee is withheld, Israeli Prime Minister Yitzhak Shamir is certain to come under pressure from right-wing elements of his Likud coalition to quit the talks.

When Israel formally requested the loan guarantee last September, Israeli officials attempted to go over President Bush's head to win passage in Congress. Mr. Bush responded by calling himself "one lonely little guy" standing up to "a thousand lobbyists working the other side of the question." Quiet compromise sought

Eager to avoid a new confrontation, the sides this time are making an effort to work out a quiet compromise.

"This time we've tried to urge the parties to sit down and bridge the differences in a low-key fashion," says Jess Hordes, Washington representative of the Anti-Defamation League of B'nai B'rith. Bush and Secretary of State James Baker III are expected to take up the issue this week. Any funds needed to advance the guarantee would be approved by March 31 as part of foreign aid appropriations legislation.

"Our position is that we still need the loan guarantees," says an Israeli diplomat in Washington. "We are waiting to hear from the administration on what they see as terms and conditions."

"There is a general consensus in Congress that we should try to help Israel," says a knowledgeable source on Capitol Hill. "But there's also a consensus that it has to be done on terms and conditions that will be helpful to the US. The devil in this one is in the details." Condition made clear

Administration officials made it clear last September that they would seek to condition any loan guarantees on a freeze by Israel of settlement activity in the occupied West Bank and Gaza Strip, a condition Shamir is unlikely to accept.

The $10 billion sought by Israel is part of an estimated $40 billion needed to help the Jewish state absorb up to 1 million Soviet immigrants over the next five years. Under the arrangement, the US would not be giving or lending money directly to Israel. Instead the US would guarantee commercial loans, enabling Israel to obtain more favorable credit terms.

Under new congressional budget legislation the US would be required to set aside a percentage of the guarantee as a hedge against default. That would probably require appropriating about $300 million if responsibility for the full $10 billion is assumed, congressional sources estimate.

Israel's flawless repayment record on past loans from the US makes it a good credit risk, Israeli sources say. But some economists are worried that Israel's sluggish socialist economy will not be able to generate the growth needed to shoulder the burden of doubling its foreign indebtedness.

Bush will have three main options for dealing with the loan guarantee, analysts say. One would be to seek a further delay, using the same rationale the president invoked when he postponed the issue last fall. At that time he warned that a decision either way could jeopardize the peace process, which began in October.

The downside to delay is that Bush could be accused of reneging on a commitment to make a final decision on the matter. In addition, the president is said to be genuinely committed to helping Israel gather in the Soviet emigres, especially as disorder in the former Soviet republics threatens new outbreaks of anti-Semitism.

Option 2 would be to provide all or part of the guarantee, but only in return for a moratorium on settlement activity. But few observers believe Shamir is personally inclined or politically able to make such a concession.

Even if he is, the US will be faced with the hard choice of whether to insist on a settlements freeze or a more ambitious freeze on all housing starts, which would also block the expansion of existing settlements in the occupied territories.

The final approach, proposed by US Sen. Patrick Leahy (D) of Vermont, would be to guarantee all or part of the $10 billion over a period of years, but to deduct the amount Israel spends on housing in the West Bank and Gaza.

One problem is that the US might have to rely on Israeli data to make its calculations. Far more serious is the question of whether the US's tabulation would include housing units built in East Jerusalem, which Israel has annexed but which the US and most other countries still regard as part of the West Bank.

"The Leahy concept does appear to offer a compromise solution," says Mr. Hordes. "Shamir is not disposed to accept a settlements freeze. This offers a way out for both sides."

Pressed by restive right-wing elements in the fragile coalition he heads, Shamir has ignored repeated US condemnation of settlement activity as a violation of international law.

According to housing ministry documents released last week by two opposition members of Israel's parliament, 18,000 housing units have been started in the West Bank over the past 18 months. Nearly 100,000 additional units are being planned. Response contemplated

As they contemplate their own response to the Israeli loan request US lawmakers in this election year will be mindful of the weight of the pro-Israel lobby, regarded as one of the most effective in Washington.

At the same time they will have to factor in the views of a recession-weary US public on whom the distinction between foreign aid and loan guarantees is likely to be lost.

"Congress is not chafing at the bit because of the domestic ramifications," says Hordes.

Israel's reputation among American voters has ebbed in recent months. A majority of Americans now support the idea of placing conditions on future aid to Israel, including loan guarantees. The poll data may be one reason that the pro-Israeli lobby is keeping a lower-than-usual profile. Another may be that many American Jews are opposed to the Shamir government's settlements policy.