Vote of confidence for Israeli economy

GEORGE BUSH'S agreement to extend dollars 10bn in loan guarantees to Israel is worth considerably more than that amount. It could have financial spinoffs to enhance Israel's position as the largest recipient of US assistance. The country already receives some pounds 3bn ( pounds 15.6bn) a year in non-refundable cash handouts, split roughly half and half between military and civilian ('economic') assistance. On top of this is the past forgiveness of some outstanding loans. And Israel government bonds are tax-free in the US.

Yesterday bankers said the US agreement will help Israel raise even more money on international markets, at advantageous rates. The governor of the Bank of Israel, Yaacov Frenkel, said the guarantees were 'a vote of confidence in the Israeli economy which will open the doors to international financial markets'.

In London Nahum Precel, treasurer and assistant general manager of Bank Leumi (UK), speaking in a personal capacity, declared that as a result 'Israel's sovereign debt will be upgraded'.

The loan guarantees are not loans or grants. They are a commitment by the US to underwrite any loan Israel obtains on the international capital markets, in the same way that government export credit guarantee departments will underwrite lines of credit on commercial transactions.

According to Israeli press reports, the normal risk premium for such loans is 7 per cent, borne by the borrower. But the agreement with Israel stipulates the premium be split evenly between the two governments.

The purpose of any loans the US is committed to underwriting is to finance the settlement of Jews from the former Soviet Union who have emigrated to Israel. For years, the US championed the cause of the right of Soviet Jews to leave for the West. Many went to the US. But after Washington imposed a quota on the number of Soviet Jews who could enter, and first the Communists and then their successors relaxed the restrictions on the numbers who could leave, Israel was swamped by Jews it could not aborb. Some 300,000 to 400,000 have come in the past couple of years. The US feels in part a moral obligation to help them. But in this election year, President Bush also sees helping them as a way of bringing Jewish voters back from the Democrat challenger, even though US taxpayers will have to foot the bill at a time when the foreign aid budget is under attack in Congress.

From the point of view of the visiting Israeli Prime Minister, Yitzhak Rabin, it was major success. He can now return home, six weeks after winning the general elections, with tangible fruits for general enjoyment.

The Palestinians and the Syrians reacted with predictable opposition to the US decision. They argued that any support for Israel could only be detrimental to their interests. The Palestine Liberation Organisation said it received the news with 'great concern, especially when the Israeli government has not committed itself yet to halting settlement activities in the occupied Palestinian and Arab territories'.

Yet the resumption of a more balanced relationship between the US and Israel is a sign of a greater Israeli flexibility which can only benefit the search for peace.