The Loan Guarantee Confrontation

Summary

In 1991–1992, the United States and Israel engaged in their most serious public confrontation over the financial relationship in modern history. Israel requested $10 billion in U.S. loan guarantees to help resettle Soviet Jewish immigrants. The George H.W. Bush administration, through Secretary of State James Baker, sought to condition the guarantees on a freeze of Israeli settlement construction in the occupied territories — a rare attempt to use America’s financial leverage to enforce stated U.S. policy. Baker gave Israel a blunt public warning that unless it stopped building Jewish settlements in occupied territories, it would not get $10 billion in U.S. loan guarantees. A U.S. Government Accountability Office investigation subsequently documented that the structure of the aid made the conditions largely unenforceable. This article documents that episode as a case study in both the leverage the United States theoretically holds and the practical limits of its willingness to use it.

Background

Loan guarantees are a distinct form of assistance from direct grants. Under a loan guarantee, the United States does not give Israel money directly; instead, it pledges to cover the loans if Israel defaults, allowing Israel — despite a poor credit rating — to borrow on international markets at favorable rates it could not otherwise obtain.

The 1991 request arose from a specific circumstance: the collapse of the Soviet Union produced a wave of Jewish emigration, and Israel sought financing to build housing and absorb hundreds of thousands of new immigrants. The issue was Prime Minister Yitzhak Shamir’s demand for a “normal” aid package of $3.2 billion for fiscal year 1992, plus $10 billion in U.S. loan guarantees, to be paid in $2 billion increments over five years. Although Israel’s U.S. lobbyists called it a “humanitarian” measure to provide housing for Soviet Jewish immigrants, the issue became entangled with settlement policy.

What Happened

The Bush administration saw the loan guarantee request as leverage to advance two goals: securing Israeli participation in the planned Madrid peace conference and halting settlement expansion in the occupied West Bank and Gaza.

Secretary of State James Baker gave Israel a blunt public warning in February 1992 that unless it stopped building Jewish settlements in occupied territories, it would not get the $10 billion in U.S. loan guarantees to help resettle immigrants from the former Soviet Union.

The confrontation escalated into one of the lowest points in the history of the relationship. Israel and its lobby attempted to bypass the White House and win approval directly from Congress, where support was strong. President Bush pushed back publicly, asking Congress to delay the vote for 120 days. The episode produced a notable moment in which Bush positioned himself, a sitting president, against the combined force of the Israeli government and its Washington lobby.

The standoff was ultimately resolved not by either side winning outright but by a change in Israeli government. After Yitzhak Rabin replaced Shamir as prime minister in 1992, Finance Minister Avraham Shohat credited Rabin’s quick moves to reverse the settlement drive of his predecessor with winning the loan guarantees just a month after he took office. Rabin’s administration stopped new construction of settlements and froze work on about half the housing units planned under Shamir in the occupied territories.

President Bush promised to recommend congressional approval of the loan guarantees after meeting with Rabin at his Kennebunkport, Maine, home in August 1992. Rabin preserved a distinction, however: he said he would allow building of any settlements he considered necessary for security, while freezing those he termed “political settlements.”

The GAO Finding: Why the Conditions Didn’t Hold

The most significant documented outcome of this episode is a U.S. Government Accountability Office report that examined whether the conditions attached to an earlier $400 million tranche of loan guarantees were actually being honored.

The GAO found that Israel was expected to certify it had used the $400 million guaranty to finance about 12,300 loans valued at $425 million for Soviet immigrant housing mortgages within Israel’s pre-1967 borders — consistent with the guaranty’s provisions. However, because of the fungibility of the money, other Israeli government funds were made available for use as the government determined, including use in the occupied territories.

In other words: even if the guaranteed loans themselves were spent inside Israel’s recognized borders as required, the financing freed up an equivalent amount of Israel’s own money to spend on settlements. The condition could be technically satisfied while its purpose was defeated.

The GAO further documented that Israel was not even providing the information required to monitor compliance. Under the terms of the loan guaranty, Israel agreed to provide periodic data on its spending in the occupied territories and settlement activities. So far, however, Israel has provided no information on spending in the occupied territories and only incomplete information on settlement activities.

This is an official U.S. government finding: Israel had agreed to disclosure conditions and was not meeting them, and the fungibility of the money rendered the spending restrictions largely symbolic.

Key Figures

President George H.W. Bush — Sought to condition the loan guarantees on a settlement freeze; publicly confronted the Israeli government and its lobby; the most direct presidential attempt to use financial leverage in the modern relationship.
Secretary of State James Baker — Delivered the public warning linking the guarantees to a settlement halt.
Prime Minister Yitzhak Shamir — Refused to halt settlement construction; lost the 1992 Israeli election partly over the resulting confrontation with Washington.
Prime Minister Yitzhak Rabin — Succeeded Shamir; froze “political” settlements (while preserving “security” settlements), which unlocked the guarantees.
U.S. Government Accountability Office — Produced report NSIAD-92-119 documenting the fungibility problem and Israel’s failure to provide required spending data.

Official Response

The Bush administration’s effort is notable precisely because it was exceptional — a rare instance of a U.S. president attempting to attach enforceable conditions to assistance and absorbing significant political cost to do so. The loan guarantee became a measuring stick of the quality of the Washington-Jerusalem relationship. Among the painful lessons learned was that when a president wants to stop a piece of legislation, he can.

The episode carried a political price for Bush domestically and is widely regarded as having contributed to friction with pro-Israel constituencies ahead of his 1992 reelection loss.

Consequences

Israel ultimately received the $10 billion in loan guarantees. Settlement construction in the occupied territories continued in the decades that followed, expanding substantially under later governments, despite the formal U.S. policy position — maintained across administrations of both parties — that settlements are an obstacle to peace.

Significance

The loan guarantee confrontation is the clearest documented case study in this archive of the United States attempting to use its financial leverage over Israel to enforce its own stated policy — and of why such attempts have been so rare. The episode establishes three facts on the record. First, the leverage is real: a U.S. president, by asking Congress to delay a vote, can halt assistance Israel considers vital, as Bush demonstrated. Second, the conditions are structurally difficult to enforce: the GAO found that the fungibility of the money allowed Israel to satisfy the letter of the spending restrictions while freeing its own funds for the settlements the restrictions were meant to prevent — and that Israel withheld the spending data it had agreed to provide. Third, the political cost is high: Bush’s confrontation is widely seen as having damaged him domestically, and no subsequent administration has mounted a comparable effort. Together these facts explain a central pattern documented throughout this category — the United States provides assistance on uniquely favorable terms, formally opposes Israeli policies like settlement expansion, and yet rarely and ineffectively uses its considerable leverage to change them. The 1991–1992 episode is the exception that illuminates the rule, and the GAO report is the government’s own documentation of why the leverage, when finally applied, did not hold.

Sources

U.S. Government Accountability Office, “Israel: U.S. Loan Guaranties for Immigrant Absorption,” Report NSIAD-92-119, February 12, 1992 — the key primary source documenting fungibility and non-disclosure
Washington Post, “Baker Bars Israeli Loan Aid Unless Settlements Are Halted,” February 25, 1992
UPI, “Israelis Pleased With Bush Reversal on Loan Guarantees,” August 11, 1992
CNN / Vincent Voice Library, Bush-Rabin joint press conference announcing the loan guarantee package, August 11, 1992 (audio archive, MSU Libraries)
Washington Report on Middle East Affairs, “Israel’s US Lobby Loses First Round to Bush in Loan Guarantee Battle,” October 1991
Contemporaneous reporting collected in the Detroit Jewish News digital archive (Bentley Historical Library, University of Michigan), September 1991–September 1992