FOREIGN AID : Israeli Loans--How Safe, How Costly? : Supporters and opponents of $10 billion in U.S. housing guarantees get out their pencils to assess who will pay.


Israel’s request for $10 billion in U.S. loan guarantees for new housing construction has set off a heated debate over how much it will eventually cost American taxpayers and how diligent the Israelis have been about avoiding costly defaults.

Supporters argue that the loan guarantees actually would cost nothing. The United States merely would serve as co-signer of loans that Israel would obtain from commercial banks. America wouldn’t lose anything unless Israel defaulted--which supporters say it has never done.

But opponents contend that Israel’s economy is almost sure to collapse under the pressure of the estimated 1 million Soviet Jewish immigrants who are expected to occupy the new houses and that default is all but certain.

By their calculations, U.S. taxpayers would be out as much as $117 billion in interest and principal on the 30-year loans, plus administrative costs that some say could run as high as $13 billion even if Jerusalem does not default.


The Bush Administration, wary about fueling the debate in public, has declined to provide official projections of the cost of the proposed loan guarantees. And analysts caution that with the situation so in flux, nearly any estimates are speculative. But knowledgeable analysts say both these extremes seem unlikely.

Estimates compiled by the Congressional Research Service show the likely cost to U.S. taxpayers in the first three years of the 30-year loan period--when administrative costs are highest--would range between $350 million and $1 billion.

CRS experts also all but rule out an Israeli default. The United States now gives Israel more than $3 billion a year in direct aid--more than 10% of its government budget. “No matter what their obligations, they will always pay their debts to the U.S. first,” says a Capitol Hill aide who has tracked U.S.-Israeli relations. “On this, their record is impeccable.”

Clyde Mark, a CRS specialist in Middle East affairs, also points out that Israel will be retiring its existing debt to the United States by 2001--just about the time the first payments on the proposed housing loans would be due. “If their economy is in trouble five years from now, look to them to go to their friends in Congress to seek forgiveness of that remaining debt,” Mark says.


Under last year’s budget legislation, the money needed to create a reserve fund must be appropriated during the first year of the proposed loan. The risk that U.S. taxpayers may eventually face is calculated as a percentage of the proposed principal.

The American Israel Public Affairs Committee argues that Israel’s credit-worthiness has improved so much that the loan request ought to qualify for a high credit rating--holding the cost of creating the reserve fund to between $55 million and $100 million.

But others are less sanguine. CRS points out that even with $3 billion a year in U.S. aid, Israel chronically runs a budget deficit, suffers from heavy unemployment and is burdened with a costly--and inefficient--centralized economy. Standard & Poor’s reportedly has given Israel a BBB minus rating, its lowest for investment bonds. And Arab sources contend that the U.S. Export-Import Bank has given Israel a D rating in its confidential A-through-F scale. (Israeli sources say the rating is a C).

CRS analyst Mark says it is likely that any objective rating that the U.S. government uses would push the costs of creating the reserve fund to between $600 million and $800 million. Negotiations with Israel could push this down to $350 million.


The administrative costs are easier to figure. In previous loans, the government has managed to meet all its expenses by assessing a one-time charge of 1% of the principal with an extra 0.5% in technical assistance, if needed. If those estimates all panned out, that would bring the grand total to between $450 million and $550 million over 10 years.

Where the Money Goes

In dollar amount, aid per capita and as a percentage of total U.S. foreign aid, Israel ranks first. For all countries, the average U.S. aid per capita is $3.57. The top 10 U.S. aid recipients are:

TOTAL AID % of TOTAL COUNTRY U.S. AID* PER CAPITA U.S. AID ISRAEL 3,000,000 $686.34 28.4 EGYPT 2,294,687 42.39 21.7 PAKISTAN 583,043 5.15 5.5 TURKEY 563,750 9.97 5.3 PHILIPPINES 494,118 7.41 4.7 EL SALVADOR 382,657 73.29 3.6 GREECE 350,700 34.84 3.3 BANGLADESH 174,683 1.48 1.6 INDIA 162,802 0.19 1.5 GUATEMALA 155,751 16.68 1.5


* In thousands of dollars

Sources: State Department, The World Almanac