Bush OKs Israel Loan Guarantees : Mideast: President eases terms for Rabin by accepting limited curtailment of settlements. He calls for an Arab gesture to break the deadlock on peace talks.

President Bush sealed his new and friendly relationship with Prime Minister Yitzhak Rabin on Tuesday by approving Israel’s request for $10 billion in loan guarantees on terms much easier than those offered to Rabin’s predecessor, Yitzhak Shamir.

With Rabin at his side in a yard near his seaside vacation home, Bush said the United States “understands” Rabin’s refusal to order a total freeze on Jewish settlement activity in the occupied West Bank and Gaza Strip, even though U.S. officials have long maintained that all settlements are an obstacle to peace. Bush said Rabin’s limited curtailment of settlements is enough.

“We salute what the prime minister is trying to do,” Bush said. “Obviously, we would not be going forward with this loan guarantee if we did not salute the change.”

When Shamir was in office, the President said he would approve the full $10-billion, five-year package only if Israel ended all settlement activity, leaving houses unfinished and stopping road and sewer projects in their tracks.

For a more limited freeze, Bush offered a smaller loan package. Shamir refused to accept either alternative.

Israel had asked the U.S. government to guarantee repayment of commercial loans to finance houses, jobs and other services for an influx of Jewish immigrants from the former Soviet Union and Ethiopia. Almost half a million have already arrived, and thousands more are expected.

The U.S. guarantees--similar to co-signing the loans--will permit the Israeli government to get much lower interest rates than it could qualify for on its own. If Israel defaults on the loans, the U.S. taxpayer would have to repay them.

Even if Israel makes the payments in full and on time, the U.S. Treasury will be liable for some administrative costs, but Rabin said Israel will reimburse the U.S. government for at least part of that.

In another demonstration of Bush’s strong support for Rabin’s centrist government, the President endorsed most of Rabin’s objectives for the Arab-Israeli peace talks that resume in Washington on Aug. 24. And he sought to shift from Israel to the Arabs the responsibility for making the concessions required to break the deadlock that has marked the negotiations since they began in Madrid last October.

“Prime Minister Rabin has persuaded me that Israel’s new government is committed to making these talks succeed,” Bush said. “And I call upon the Arab parties to respond in kind. The time has come to make peace, not simply to talk of it.”

The President added that Washington wants a comprehensive peace, codified by treaty, that would open the way for trade, tourism and other aspects of normal relations.

The Israelis have long sought such a relationship, which would constitute the Arabs’ acknowledgment of Israel’s right to live in the region, but only Egypt has signed a peace treaty with Israel. Some Arab states, especially Syria, have resisted even the discussion of such close ties, arguing that the only issue before the peace conference is the return of territory that Israel occupied during the 1967 Middle East War.

“We shall do our best to inject new momentum to the negotiations,” Rabin said.

Bush and Rabin were effusive in their declarations that the close U.S.-Israeli alliance has been restored after the friction of Shamir’s tenure as prime minister. Bush contrasted Rabin’s decision to limit West Bank and Gaza settlements with Shamir’s aggressive policy of building up the Jewish population of the territories to dilute their Palestinian character. At present, about 115,000 Jews and 1.7 million Palestinians live in the territories.

Shortly after he took office last month, Rabin announced curtailment of settlement-building. But he said Israel would finish houses that were partially up and would continue to settle Jews in “strategic” parts of the occupied territories such as the Jordan Valley and the Golan Heights and in neighborhoods ringing Jerusalem. He said he would stop “political” settlements, essentially those that do not meet his strategic criteria.

On Sunday, just before Rabin arrived in Maine, a senior Administration official said Washington does not agree with the new prime minister’s distinction between strategic and political settlements. The official said that Washington considers all the outposts to be obstacles to peace because they will make it far more difficult for Israel to make a land-for-peace deal with its Arab neighbors.

But Rabin clearly won the day in his talks with Bush. The President offered no public criticism of Rabin’s approach, and he did not impose any restrictions on the loan package to penalize Israel for continuing some settlements.

Because the loan package runs for five years, Washington--in effect--surrendered its leverage over Israeli settlement policy for most of the rest of this century.

The loan package requires congressional approval, but that is virtually assured.

In Jerusalem, Hanan Ashrawi, spokeswoman for the Palestinian delegation to the peace talks, objected to Bush’s decision to approve the guarantees without a total freeze on settlements.

“If the loan guarantees are given while settlement actions are continuing, then this invalidates the role of the United States as a peace broker,” Ashrawi said, according to the Reuters news agency.

Bush’s political strategists clearly hope that the refurbished relationship with Israel will appeal to Jewish voters, many of whom were upset by the President’s public feud with Shamir. Bush got about 30% of the Jewish vote in 1988 and needs at least that much this time if he is to have any hope of carrying such key states as California and New York.

But the President recoiled when he was asked to assess the impact of his actions on the campaign.

“We’re not talking here about domestic United States politics, nor are we talking about domestic Israeli politics,” Bush said. “I think what we are talking about is too important.”

But in an election year, politics is never very far below the surface. Bush was asked about his plans for Secretary of State James A. Baker III: Will he continue to oversee Arab-Israeli peace talks or will he be brought to the White House to try to rejuvenate Bush’s faltering reelection campaign?

In a tongue-in-cheek explanation to Rabin, Bush said the question referred to “a lot of domestic speculation that the press has written with such certainty and finality . . . that Jim Baker will leave the State Department.”

“That was not discussed with the prime minister,” Bush told the reporters.

Asked to assess the impact of a Baker departure on the peace process, Rabin deadpanned: “I don’t deal with domestic political American or personal domestic American problems.”

Turning to the warfare in Bosnia-Herzegovina, Rabin gave Bush a gentle push toward more forceful action.

“We, the Jewish people, having suffered persecution throughout history, can never remain indifferent to such tragedies,” Rabin said. “The killing must stop. And I know that the United States is now making great efforts towards a solution there.”