US Seeks Solution To Israel Aid Impasse

WHEN one prominent congressman heard last year that Israel was about to ask the United States for a $10 billion housing-loan guarantee to help settle immigrants from the former Soviet Union, he gagged.

"I haven't had a housing-loan guarantee in my own district in years," said the lawmaker, a strong supporter of Israel. "Why don't they call it something else, like economic development."

"It's even hard to vote for regular aid [for Israel] when some of my constituents are eating cat food," says another.

The comments suggest one reason that the US has been slow to respond to Israel's urgent request for help.

But beyond hard times at home, the loan guarantee has been the casualty of a heated standoff between the Bush administration and Israel over the controversial issue of Jewish settlements in the Israeli-occupied West Bank and Gaza Strip.

As a March 31 deadline approaches for wrapping the guarantee into pending foreign aid legislation, the search is on for a last-minute compromise.

The loan guarantee has become a top priority for Israel, which needs to raise up to $70 billion to absorb some 1 million newcomers over the next few years.

"It will be a very bad day if Israel does not get the money," says an Israeli diplomat in Washington.

But, priority or not, Israeli Prime Minister Yitzhak Shamir has been unwilling to pay the Bush administration's asking price: a halt to the settlements, which the administration says are inimical to peace.

The latest efforts to find a compromise have been spearheaded by Sen. Patrick Leahy (D) of Vermont, chairman of the Senate subcommittee that deals with foreign aid.

An amendment to foreign-aid legislation proposed by Senator Leahy and tacitly supported by Secretary of State James Baker III in congressional hearings this week would appropriate the full $10 billion, to be dispersed in five one-year installments of $2 billion each.

But under the Leahy proposal the US would deduct a dollar from this amount for every dollar Israel spends on housing and infrastructure in the territories.

The plan would also give President Bush the right to attach conditions - including a settlements freeze - on its disbursement.

"Congress usually says to the president, 'Here's the money; spend it, says a congressional source. "Under this arrangement it would be saying, 'You decide if it's to be spent and on what terms.

The compromise would benefit Israel by keeping negotiations alive and by putting the loan guarantee into law, at least technically. Given President Bush's determined opposition to settlements, it may be the best deal Israel can now get, diplomatic analysts say.

But the compromise would also be good for the Bush administration. It would help ensure passage of the foreign aid bill, which contains assistance to the former Soviet republics championed by Bush and Baker. It would also give the administration continued leverage to force a reduction or freeze of settlements which, in turn, could be used as an incentive to keep Arab nations engaged in ongoing Middle East peace talks.

"The reduction of settlements is the one positive act the administration can bring to the bargaining table right now," says Martin Indyk, executive director of the Washington Institute for Near East Policy. "It's something they can use with the Arabs to prove they have a stake in remaining engaged."

Congressional sources say the March 31 deadline could be skirted by dealing with the loan guarantee in separate legislation or by extending this year's stopgap foreign aid bill until Congress and the administration agree on a compromise.

Israeli sources say that, by agreeing to freeze settlements now, Israel would be making a major concession to the Arab states with which it is now engaged in Middle East peace talks.

"In the middle of talks, there's no point giving any concession without reciprocity," says the Israeli diplomat.

Administration spokesmen don't deny that a settlements freeze would satisfy a longstanding Arab demand.

But they point out that settlements have been opposed by every US president since 1967, the year Israel occupied the West Bank and Gaza.

The spokesmen add that the alternative - looking the other way while Israel continues to build new settlements - would almost certainly undermine hopes for the compromise needed to produce the peace they consider critical to American interests in the Middle East.

The loan guarantee - which would not be a form of foreign aid - would enable Israel to borrow in commercial markets at lower interest rates. It would also send a signal that would give financial communities in other countries confidence to lend to Israel.

Most of the $60 billion to $70 billion Israel is now seeking will be raised through local taxes.

But at least $20 billion needs to come from abroad in hard currency to enable Israel to import the raw material and machinery needed to create new industries and new jobs, Israeli source say.