Baker Hints at Israel Loan Aid : Diplomacy: He says U.S. is eager to resolve dispute over $10 billion in guarantees. Rabin’s Cabinet gives itself power to halt settlements approved by Shamir.

Secretary of State James A. Baker III on Sunday hinted that the Bush Administration will clear the way for U.S. loan guarantees to Israel, hours after the new Cabinet of Prime Minister Yitzhak Rabin gave itself the power to halt the construction of settlements approved by the previous Israeli government.

Baker, hailing a “new environment” brought about by last month’s election victory of Rabin’s Labor Party, arrived here Sunday night making it plain that the Bush Administration is prepared to give friendly treatment to the new Israeli government.

The secretary indicated that the Administration is eager to settle the dispute over $10 billion in U.S.-backed loan guarantees that has clouded relations between the two countries for the past year.

The White House has held up a request for the loan guarantees because the previous Israeli government of Yitzhak Shamir refused to stop the construction of settlements in the occupied West Bank and Gaza Strip. The U.S. guarantees make it easier and cheaper for Israel to get the loans from commercial banks, which it says it needs to create jobs for a massive wave of new immigrants.

After an initial 90-minute meeting with Rabin on Sunday night, Baker acknowledged that a prime focus of the talks was “how we can move forward on the question of U.S. assistance.”

He also applauded the first, cautious steps by the Rabin government to curtail the expansion of settlements. “It will make a difference,” Baker said.

Rabin, too, emphasized that the issue of the loan guarantees is under discussion. The two men will resume their talks today.

Earlier in the day, Rabin expressed hope of a “different atmosphere” that would further Middle East peace talks and encourage Washington to attend to Israel’s financial needs.

Last Thursday, Rabin’s government announced a one-week freeze on the signing of contracts for settlement construction left over from the previous government. And on Sunday, hours before Baker’s arrival, the new Cabinet went one step further by indicating that it would review all contracts, including those for housing already under construction.

Baker was clearly delighted and went out of his way to contrast the policies of Rabin and Shamir.

“I have to say it’s a pleasure to be going to Israel under circumstances in which I anticipate that we will not be met with the opening of a new settlement or settlements, but rather a suspension of contracts for the construction of new houses or new settlement activity,” the secretary of state told reporters on his plane as he was flying to Israel.

Baker’s remarks underscored the fact that, with the departure of Shamir and his Likud government, the Bush Administration is eager to mend fences with Israel. Such an action would have domestic political benefits for President Bush, whose past refusal to grant loan guarantees to Israel has caused friction with some American Jewish groups.

Still, Baker stressed that the Administration is not prepared to free up the loan guarantees Israel desperately needs to boost its economy until it sees exactly what the new freeze on settlements will mean. Baker said he wants to find out how long the freeze will last and what exceptions Israel may make for what Rabin has called “security” settlements.

Rabin has drawn a distinction between “security” settlements on the border with Jordan and near Jerusalem and “political” settlements in Arab-populated areas, which he means to stop developing. It is not clear how many of the settlements fall into each category and whether the Bush Administration will accept the distinction.

The decision to review the actions of the previous, pro-settlement government--made at the first meeting of Rabin’s Cabinet--was meant to signal a significant shift in policy, Rabin supporters and officials said.

Israeli officials said they are seeking estimates of the cost of halting construction under way in established settlements and of annulling contracts that have been signed. No final decision on what construction will continue and what will be stopped has been reached.

“We are making a total review,” Foreign Ministry spokesman Baruch Bina said. “We hope that everyone concerned will look at how we perform. That will be what is important.”

Pro-settlement members of the previous government reacted harshly to the latest moves by Rabin. “Freezing construction, freezing settlements on the land . . . is giving parts up of Greater Israel without negotiations, before negotiations, in exchange for money,” former Prime Minister Shamir complained.

Baker’s visit marked his first trip to the Middle East in nine months. Since then, Israeli, Arab and Palestinian negotiators have held five rounds of peace talks but made little progress.

There were new hints that this may be Baker’s last trip, too, in his current tour as secretary of state. Aboard his plane, he repeatedly refused to rule out the frequently discussed possibility that he will soon move to some new position to direct Bush’s campaign for reelection.

Asked whether he had discussed that possibility with Bush when the two men went fishing in Wyoming last week, Baker replied:

“The President and I talked about a whole lot of things. . . . It would not be, I don’t think, realistic to think that we did not discuss this election year, and indeed we did. . . . Right now, I’m totally focused on this trip, which as I’ve said comes at what I think is a very important time in the region.”

The secretary said he hopes his current trip to five countries in the region will revive the Middle East peace talks.

“I hope that my presence . . . will help to focus everyone’s mind and attention,” he said. “I hope to directly engage the various governmental representatives in a way that will permit the negotiators to get a mandate to negotiate.”

Baker served notice that he expects Arab governments and Palestinians to begin showing some flexibility, now that Israel is beginning to change its policies.

He is scheduled to visit Jordan, Syria, Egypt and Saudi Arabia later this week. With Rabin standing at his side, Baker said he will give Arab governments the message that “we now have a government here (in Israel) which is serious with respect to limiting the settlement activity”--an Israeli policy that, he noted, Arab leaders have long sought.

In Israel, the Baker visit was viewed as an opportunity to patch up relations between the two countries that had frayed during Shamir’s rule. “There is room to assume,” wrote the liberal Haaretz newspaper in an editorial, “that Baker’s early visit to Jerusalem . . . points to a desire by the United States to renew the traditional relations of trust with Israel.”

Observers here attributed Rabin’s electoral victory in part to Washington’s displeasure with the Shamir government. Strained relations made the Israeli middle class nervous, and there was a shift toward Rabin’s Labor Party.

In a sense, the political tables are now turned, at least in the Israeli view. Bush would like to siphon off some of the Jewish vote that might go to Democratic Party presidential candidate Bill Clinton, who has surged ahead in the polls. A smile from Rabin might help.

* PLO OVERRULED: West Bank compromise ignored Arafat’s wishes. A6