884A.10/6–1752
No. 445
Memorandum of Conversation, by the
Officer in Charge of Palestine–Israel–Jordan Affairs (Waller)
Subject:
- Visit of Ambassador Eban Regarding Middle East Problems and Israel’s Financial Situation.
Participants:
- Ambassador Abba Eban, Israel Embassy
- Miss Esther Herlitz, First Secretary, Israel Embassy
- NEA—Mr. Byroade
- NE—Mr. Waller
After expressions of welcome to Mr. Byroade on his return from his recent trip to the Near East, including Israel, the Ambassador asked Mr. Byroade what his impressions were. Mr. Byroade said that he had not been in Israel long enough to formulate opinions regarding Israel’s difficulties but he had noted several things that caused him concern, one of which was the economic situation. He thought it a most formidable obstacle to Israel’s future. He wondered whether mechanizations of agriculture had not been overdone and whether changes in some other aspects of Israel’s economic life might be beneficial. Without replying to Mr. Byroade’s speculation, Mr. Eban said that the specific matter which he wished to discuss was Israel’s financial condition, particularly in view of the appointment of Israel’s Foreign Minister, Mr. Sharett, with Secretary Acheson the following day.
Mr. Eban recalled his first visit to Mr. Byroade, shortly after the latter assumed office, when Mr. Byroade found means to assist Israel in solving the most recent of Israel’s financial problems. He said the use of MSA funds in that connection was an expedient but not a healthy one. The money obtained was used for the repayment of debt purchases of such commodities as wheat and fuel and a power project south of Israel. The Ambassador also recalled that Congress has now passed a new Mutual Security Act authorizing some $73 million for Israel during the fiscal year beginning July 1 and that Israel hopes to benefit from these funds as soon as possible.
In connection with the financial assistance given in late April and early May, Mr. Mikesell is proceeding to Israel to work with Israeli officials on Israel’s balance of payments. Israel has accepted the position of Mr. Mikesell and will cooperate with him.
The present problem concerns Israel’s short-term debt which, he stated, was approximately $100 million and which becomes due [Page 943] within one year from June 15. Israel’s estimated import purchase needs, based on current import restrictions, totals about $300 million per year. On the credit side are exports totaling about $70 million, income from bonds and UJA about $120 million and grant-in-aid for the fiscal year amounts to $73 million. The difference between this total of $263 million and the $300 million in expenditures is made up by invisible exports, including tourism. Therefore, there is an approximate balance between Israel’s income and expenditures when the short-term debt is not taken into consideration. Israel is not in a position to pay the short-term debts. The use of MSA funds for this purpose is not in the spirit of the grant-in-aid program and Israel does not desire to resort to those funds to pay the short-term debts.
The most helpful solution would be to find a way to refund short-term debts over a longer period and to schedule the refunded debt for payment along with Israel’s further obligations. Refinancing through private banks and sources is apparently out of the question, since investigation has shown that long-term financing hardly exists in the US. The solution therefore requires governmental assistance. This appears to be the only way by which the MSA program can be preserved. One method would be for the Export-Import Bank to consolidate Israel’s existing debts and arrange repayment by Israel over a long period. Another possibility would be the use of the Stabilization Fund of the US Treasury. The Ambassador said that he understood the Secretary of the Treasury has the power to purchase foreign currencies under certain circumstances, which has the effect of a foreign currency loan. He cited Mexico as a country which has benefited by the use of the Stabilization Fund.
To indicate that Israel’s ability to repay is not completely black, the Ambassador stated that the compensation negotiations with Germany had taken a favorable turn during the past few days. The Germans have informally offered as a basis of negotiation the payment of 3 1/2 billion DM in goods over a 12-year period. One-half billion DM of this sum is for payment of Jewish material claims but the entire sum will apparently be paid to Israel and Israel will then assume responsibility for paying the Jewish claimants. The prospect of receiving German goods having a value of $50 million or more each year will make Israel a better risk and make possible repayment of the refunded debt over a longer period. Increased production in Israel will also add to Israel’s resources.
In reply to a question whether the figure of $100 million includes short-term debts owed by Israel to other countries, the Ambassador replied that it did not include sterling but he did not know whether [Page 944] it included other currencies. A paper containing this information is on its way from Israel at the present time.
Mr. Byroade replied that “We must do something” but, having just returned, he did not know how or what. In his recent visit to the Arab states he was continually “beaten over the head” with alleged US favoritism to Israel and the American Government’s ready willingness to rescue Israel from every financial difficulty. Mr. Byroade said that he told Prime Minister Ben-Gurion that the Arabs complain most about the disproportion between US aid to them and to Israel. They insist that every time Israel has financial trouble, the US bails Israel out. This belief by the Arabs may become a security problem for us. We therefore hope for cooperation from Israel officials to find a more permanent solution to Israel’s financial difficulties.
Mr. Eban replied that there is certainly an Arab position regarding Israel but he believed it was exaggerated. If Israel should be wiped out tomorrow, he said, there would still be the Tunisian question, an Eygptian problem, and the situation in Iran.
Mr. Byroade replied that while there was much to what the Ambassador had said, it is nevertheless a fact that there exists a situation where Arab states are not strong enough to make peace. Besides they are convinced Israel does not want peace.
Mr. Byroade then mentioned the subject of blocked Arab accounts and said “Don’t forget the moral side of this question—for three years you have held the Germans to their moral position and now you do not apply it to the Arabs.”
When the Ambassador asked, in reply, why the Arabs refused to accept a non-aggression pact offered them at Paris, Mr. Byroade replied that those signing for the Arab states would probably have been shot. To this, Mr. Eban said he realized Israel’s economic stability must be proved before the Arabs will acknowledge Israel’s existence.
Mr. Byroade brought the interview to an end by expressing the hope that his frank comments would not be misunderstood and that every effort would be made to find a solution to Israel’s financial problem.