Loan Decision Muddies Peace Talks Long-Delayed Action by Washington Becomes Troubling Factor in Peace Negotiations. ISRAELI - US RELATIONS

Article excerpt

ON hold and out of sight for the past four months, the controversial issue of whether the United States should underwrite a multibillion-dollar loan to Israel has come back to haunt the Bush administration and Congress.

When the issue first surfaced last September, it led to an acrimonious confrontation between the administration and supporters of Israel. A decision was deferred for 120 days, but not before damaging already strained relations between Washington and Jerusalem.

As the new day of decision draws near, there is growing concern that no matter how the issue is handled it could jeopardize the Middle East peace process, now in its fragile early stages.

"The administration is in a bind because it was planning to see movement in the peace process by now and to be able to make up its mind on that basis," says a pro-Israel lobbyist in Washington.

The main risk is that if the $10 billion loan guarantee is granted, Arab negotiators will boycott the talks. If the guarantee is withheld, Israeli Prime Minister Yitzhak Shamir is certain to come under pressure from right-wing elements of his Likud coalition to quit the talks.

When Israel formally requested the loan guarantee last September, Israeli officials attempted to go over President Bush's head to win passage in Congress. Mr. Bush responded by calling himself "one lonely little guy" standing up to "a thousand lobbyists working the other side of the question." Quiet compromise sought

Eager to avoid a new confrontation, the sides this time are making an effort to work out a quiet compromise.

"This time we've tried to urge the parties to sit down and bridge the differences in a low-key fashion," says Jess Hordes, Washington representative of the Anti-Defamation League of B'nai B'rith. Bush and Secretary of State James Baker III are expected to take up the issue this week. Any funds needed to advance the guarantee would be approved by March 31 as part of foreign aid appropriations legislation.

"Our position is that we still need the loan guarantees," says an Israeli diplomat in Washington. "We are waiting to hear from the administration on what they see as terms and conditions."

"There is a general consensus in Congress that we should try to help Israel," says a knowledgeable source on Capitol Hill. "But there's also a consensus that it has to be done on terms and conditions that will be helpful to the US. The devil in this one is in the details." Condition made clear

Administration officials made it clear last September that they would seek to condition any loan guarantees on a freeze by Israel of settlement activity in the occupied West Bank and Gaza Strip, a condition Shamir is unlikely to accept.

The $10 billion sought by Israel is part of an estimated $40 billion needed to help the Jewish state absorb up to 1 million Soviet immigrants over the next five years. Under the arrangement, the US would not be giving or lending money directly to Israel. Instead the US would guarantee commercial loans, enabling Israel to obtain more favorable credit terms.

Under new congressional budget legislation the US would be required to set aside a percentage of the guarantee as a hedge against default. That would probably require appropriating about $300 million if responsibility for the full $10 billion is assumed, congressional sources estimate.

Israel's flawless repayment record on past loans from the US makes it a good credit risk, Israeli sources say. …